Canadian Pacific announces third-quarter results



    CALGARY, Oct. 28 /CNW/ - Canadian Pacific Railway Limited (TSX/NYSE:   CP)
announced its third-quarter results today. Net income was $173 million down
from $219 million in third-quarter 2007 and diluted earnings per share was
$1.11 down from $1.41 in third-quarter 2007. This decrease is primarily due to
foreign exchange impacts on long-term debt in 2007 and charges associated with
the revaluation of an investment in asset backed commercial paper (ABCP).
Excluding these two items, diluted earnings per share was down two per cent.

    
    SUMMARY OF THIRD-QUARTER 2008 COMPARED WITH THIRD-QUARTER 2007 EXCLUDING
    FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT AND OTHER SPECIFIED
    ITEMS:

    -   Diluted earnings per share decreased to $1.20 from $1.23.
    -   Income was $186 million down from $190 million.
    -   Total revenues rose seven per cent to $1.26 billion from
        $1.19 billion.
    -   Operating expenses were $962 million an increase from $866 million
        with the price of fuel the single largest driver contributing to the
        increase in expenses.
    

    "Our pricing gains and focused cost containment helped offset declines in
bulk volumes," said Fred Green, President and CEO. "Fuel expenses were a
serious headwind, but we saw strong recovery in our operations with
progressive improvement as we moved through the quarter. In a declining
market, our operating ratio for the third quarter improved 340 basis points to
76.0 per cent from second quarter 2008 of 79.4 per cent."
    Freight revenues rose eight per cent in the third quarter on continued
pricing strength, inclusive of fuel recoveries. Industrial and consumer
products revenues were up 24 per cent, with automotive and intermodal revenues
increasing 16 and 11 per cent respectively. Sulphur and fertilizer revenue
improved eight per cent with coal improving five per cent over 2007. These
gains were offset by a decrease in grain revenue of four percent due mainly to
a late harvest.
    Operating expenses increased 11 per cent in the third quarter driven
mainly by a 49 per cent ($90 million) increase in fuel expense over the same
quarter in 2007.

    SUMMARY OF FIRST NINE-MONTHS 2008 COMPARED WITH FIRST NINE-MONTHS 2007

    Net income for the first nine months of 2008 was $418 million compared
with $604 million in 2007. Diluted earnings per share was $2.70 down from
$3.87. This decrease was mostly the result of a large foreign exchange gain on
long-term debt in the first nine months of 2007 and lower operating income in
2008.

    
    EXCLUDING FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT AND OTHER
    SPECIFIED ITEMS:

    -   Diluted earnings per share was $2.92 down seven per cent from $3.13.
    -   Income decreased seven per cent to $453 million from $488 million.
    -   Total revenues increased three per cent to $3.6 billion.
    -   Operating expenses were up eight per cent to $2.9 billion.
    

    2008 OUTLOOK

    "The uncertainty associated with the global economy offsets the positive
impact on our financial results of the decrease in the price of crude oil and
the weakening of the Canadian dollar against the US dollar," said Kathryn
McQuade, Chief Financial Officer. "We are confirming our outlook for adjusted
diluted earnings per share in the range of $4.00 - $4.20."
    This outlook assumes an average currency exchange rate of $1.04 per U.S.
dollar (US$0.96) for the full year, a change from the previous assumption of
the Canadian dollar at par with the U.S. dollar. Crude oil prices (WTI) are
estimated to average US $105 per barrel for the year (versus the previous
assumption of US $121 per barrel). Crack spreads are estimated to average US
$20 per barrel for the year (versus the previous assumption of US $23 per
barrel). The estimated average all-in fuel price is expected to be between US
$3.35 and $3.45 per U.S. gallon for the year. The full year averages reflect
assumptions for the fourth-quarter of an exchange rate of $1.14 per U.S.
dollar (US$0.88) and a crude oil price of $85 per barrel.
    The decrease in the price of fuel had an impact on the outlook for both
revenue and expenses. CP expects to grow total revenue by four to six per cent
in 2008, compared with the previous outlook of six to eight per cent. Total
operating expenses are expected to increase by eight to 10 per cent, down from
the previous outlook of 11 to 13 per cent. CP expects its normalized tax rate
to be between 26 per cent and 27 per cent, excluding the impact of the Dakota
Minnesota & Eastern Railroad (DM&E) equity pick-up. Free cash is expected to
be approximately $150 million.
    The 2008 outlook excludes the projected revenues and expenses of the
Dakota Minnesota & Eastern Railroad (DM&E) which will be fully consolidated
with CP for November and December 2008.

    
    FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT AND OTHER SPECIFIED
    ITEMS
    

    CP had a foreign exchange loss on long-term debt of $3 million (a gain of
$6 million after tax) in the third quarter of 2008, compared with a foreign
exchange gain on long-term debt of $64 million ($43 million after tax) in the
third quarter of 2007.
    For the first nine months of 2008, CP had a foreign exchange loss on
long-term debt of $12 million (no gain or loss after tax) compared with a
foreign exchange gain of $162 million ($114 million after tax) in the first
nine months of 2007.
    At September 30, 2008 CP held investments in Canadian Non-Bank Asset
Backed Commercial Paper (ABCP) with an original cost of approximately
$144 million. In the third-quarter of 2007, CP adjusted the estimated fair
value of the investment and took a charge of $22 million ($15 million after
tax) and classified the investments as long-term investments. In the first
quarter 2008 in recognition of changing market conditions impacting these
investments, CP further adjusted the estimated fair value of the investments
and took an additional charge of $21 million ($15 million after tax). In the
third-quarter, again, in response to changes in market conditions, CP adjusted
the estimated fair value of the investments and took a charge of $28 million
($20 million after tax), respectively.
    Continuing uncertainties regarding the value of the assets which underlie
the ABCP, the amount and timing of cash flows and the outcome of the
restructuring process could give rise to a material change in the value of the
Company's investments in ABCP which would impact the Company's near-term
earnings.
    In the second quarter of 2007 the Company recorded a future income tax
benefit of $17 million as an other specified item.

    Presentation of non-GAAP earnings

    CP presents non-GAAP earnings in this news release to provide a basis for
evaluating underlying earnings and liquidity trends in its business that can
be compared with prior periods' results of operations. These non-GAAP earnings
exclude foreign currency translation effects on long-term debt, which can be
volatile and short term. In addition these non-GAAP measures exclude other
specified items that are not among CP's normal ongoing revenues and operating
expenses. The impact of volatile short-term rate fluctuations on
foreign-denominated debt is only realized when long-term debt matures or is
settled. A reconciliation of income, excluding foreign exchange gains and
losses on long-term debt and other specified items, to net income as presented
in the financial statements is detailed in the attached Summary of Rail Data.
Diluted EPS, excluding foreign exchange gains and losses on long-term debt and
other specified items, is also referred to in this news release as "adjusted
diluted EPS".
    Free cash is calculated as cash provided by operating activities, less
cash used in investing activities and dividends paid, adjusted for the
acquisition of the DM&E, and now excluding changes in the accounts receivable
securitization program, which was terminated in the second quarter of 2008.
Free cash is adjusted for the DM&E acquisition, as it is not indicative of
normal day-to-day investments in the Company's asset base. The securitization
of accounts receivable is a financing-type transaction, which is excluded to
clarify the nature of the use of free cash.
    Earnings that exclude the foreign exchange currency translation impact on
long-term debt and other specified items, and free cash after dividends, as
described in this news release, have no standardized meanings and are not
defined by Canadian generally accepted accounting principles and, therefore,
are unlikely to be comparable to similar measures presented by other
companies.
    Other specified items are material transactions that may include, but are
not limited to, restructuring and asset impairment charges, gains and losses
on non-routine sales of assets, unusual income tax adjustments, and other
items that do not typify normal business activities.

    Note on forward-looking information

    This news release contains certain forward-looking statements relating
but not limited to our operations, anticipated financial performance and
business prospects. Undue reliance should not be placed on forward-looking
information as actual results may differ materially.
    By its nature, CP's forward-looking information involves numerous
assumptions, inherent risks and uncertainties, including but not limited to
the following factors: changes in business strategies; general North American
and global economic and business conditions; risks in agricultural production
such as weather conditions and insect populations; the availability and price
of energy commodities; the effects of competition and pricing pressures;
industry capacity; shifts in market demand; changes in laws and regulations,
including regulation of rates; changes in taxes and tax rates; potential
increases in maintenance and operating costs; uncertainties of litigation;
labour disputes; risks and liabilities arising from derailments; timing of
completion of capital and maintenance projects; currency and interest rate
fluctuations; effects of changes in market conditions on the financial
position of pension plans and investments; and various events that could
disrupt operations, including severe weather conditions, security threats and
governmental response to them, and technological changes.
    There are factors that could cause actual results to differ from those
described in the forward-looking statements contained in this news release.
These more specific factors are identified and discussed in the Outlook
section and elsewhere in this news release with the particular forward-looking
statement in question.
    Except as required by law, CP undertakes no obligation to update publicly
or otherwise revise any forward-looking information, whether as a result of
new information, future events or otherwise.

    Canadian Pacific, through the ingenuity of its employees located across
Canada and in the United States, remains committed to being the safest, most
fluid railway in North America. Our people are the key to delivering
innovative transportation solutions to our customers and to ensuring the safe
operation of our trains through the more than 900 communities where we
operate. Our combined ingenuity makes CP a better place to work, rail a better
way to ship, and North America a better place to live. Come and visit us at
www.cpr.ca to see how we can put our ingenuity to work for you. Canadian
Pacific is proud to be the official rail freight services provider for the
Vancouver 2010 Olympic and Paralympic Winter Games.



    
    STATEMENT OF CONSOLIDATED INCOME
    (in millions of Canadian dollars, except per share data)

                                                        For the three months
                                                        ended September 30
                                                           2008         2007
                                                     ------------------------
                                                            (unaudited)
    Revenues
      Freight                                        $  1,239.5   $  1,147.6
      Other                                                25.2         40.3
                                                     ------------------------
                                                        1,264.7      1,187.9
    Operating expenses
      Compensation and benefits                           312.3        313.5
      Fuel                                                275.8        185.6
      Materials                                            49.3         49.6
      Equipment rents                                      44.4         49.6
      Depreciation and amortization                       120.8        118.0
      Purchased services and other                        158.9        149.9
                                                     ------------------------
                                                          961.5        866.2
                                                     ------------------------
    Revenues less operating expenses                      303.2        321.7

    Other charges (Note 4)                                  2.8          8.1
    Equity income in Dakota, Minnesota
     & Eastern Railroad Corporation (Note 10)             (16.5)           -
    Change in estimated fair value of Canadian
     third party asset-backed commercial paper
     (Note 10)                                             28.1         21.5
    Foreign exchange losses (gains) on long-term debt       2.9        (64.3)
    Interest expense (Note 5)                              64.5         44.9
    Income tax expense (Note 6)                            48.7         92.9
                                                     ------------------------

    Net income                                       $    172.7   $    218.6
                                                     ------------------------
                                                     ------------------------

    Basic earnings per share (Note 7)                $     1.12   $     1.43
                                                     ------------------------
                                                     ------------------------

    Diluted earnings per share (Note 7)              $     1.11   $     1.41
                                                     ------------------------
                                                     ------------------------

    See notes to interim consolidated financial statements.



    STATEMENT OF CONSOLIDATED INCOME
    (in millions of Canadian dollars, except per share data)

                                                        For the nine months
                                                        ended September 30
                                                           2008         2007
                                                     ------------------------
                                                            (unaudited)
    Revenues
      Freight                                        $  3,557.0   $  3,412.6
      Other                                                74.9        106.7
                                                     ------------------------
                                                        3,631.9      3,519.3
    Operating expenses
      Compensation and benefits                           956.1        975.8
      Fuel                                                766.3        550.5
      Materials                                           171.3        167.6
      Equipment rents                                     136.4        162.4
      Depreciation and amortization                       365.4        355.7
      Purchased services and other                        483.9        448.6
                                                     ------------------------
                                                        2,879.4      2,660.6
                                                     ------------------------
    Revenues less operating expenses                      752.5        858.7

    Other charges (Note 4)                                 14.4         21.1
    Equity income in Dakota, Minnesota
     & Eastern Railroad Corporation (Note 10)             (40.9)           -
    Change in estimated fair value of Canadian
     third party asset-backed commercial paper
     (Note 10)                                             49.4         21.5
    Foreign exchange losses (gains) on long-term debt      12.4       (161.5)
    Interest expense (Note 5)                             187.3        140.9
    Income tax expense (Note 6)                           111.5        232.8
                                                     ------------------------

    Net income                                       $    418.4   $    603.9
                                                     ------------------------
                                                     ------------------------

    Basic earnings per share (Note 7)                $     2.72   $     3.91
                                                     ------------------------
                                                     ------------------------

    Diluted earnings per share (Note 7)              $     2.70   $     3.87
                                                     ------------------------
                                                     ------------------------

    See notes to interim consolidated financial statements.



    CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
    (in millions of Canadian dollars)

                                                        For the three months
                                                        ended September 30
                                                           2008         2007
                                                     ------------------------
                                                            (unaudited)
    Comprehensive income

    Net income                                       $    172.7   $    218.6

    Other comprehensive income

      Net change in foreign currency translation
       adjustments, net of hedging activities               2.2         (0.7)

      Net change in losses on derivatives
       designated as cash flow hedges                     (11.3)        (5.9)
                                                     ------------------------
      Other comprehensive loss before income taxes         (9.1)        (6.6)

      Income tax recovery (expense)                        10.2         (2.5)
                                                     ------------------------
    Other comprehensive income (loss) (Note 13)             1.1         (9.1)
                                                     ------------------------
    Comprehensive income                             $    173.8   $    209.5
                                                     ------------------------
                                                     ------------------------



                                                        For the nine months
                                                        ended September 30
                                                           2008         2007
                                                     ------------------------
                                                            (unaudited)
    Comprehensive income

    Net income                                       $    418.4   $    603.9

    Other comprehensive income

      Net change in foreign currency translation
       adjustments, net of hedging activities               4.4         (3.9)

      Net change in losses on derivatives
       designated as cash flow hedges                      (3.4)       (18.9)
                                                     ------------------------
      Other comprehensive income (loss) before
       income taxes                                         1.0        (22.8)

      Income tax recovery (expense)                        12.9         (3.8)
                                                     ------------------------
    Other comprehensive income (loss) (Note 13)            13.9        (26.6)
                                                     ------------------------
    Comprehensive income                             $    432.3   $    577.3
                                                     ------------------------
                                                     ------------------------

    See notes to interim consolidated financial statements.



    CONSOLIDATED BALANCE SHEET
    (in millions of Canadian dollars)
                                                   September 30  December 31
                                                           2008         2007
                                                  ---------------------------
                                                            (unaudited)
    Assets
    Current assets
      Cash and cash equivalents                      $     97.9   $    378.1
      Accounts receivable and other
       current assets (Note 9)                            747.0        542.8
      Materials and supplies                              231.8        179.5
      Future income taxes                                  59.1         67.3
                                                  ---------------------------
                                                        1,135.8      1,167.7

    Investments (Note 10)                               1,774.5      1,668.6
    Net properties                                      9,628.9      9,293.1
    Other assets and deferred charges (Note 15)         1,510.5      1,235.6
                                                  ---------------------------
    Total assets                                     $ 14,049.7   $ 13,365.0
                                                  ---------------------------
                                                  ---------------------------
    Liabilities and shareholders' equity
    Current liabilities
      Short-term borrowing                           $    280.0   $    229.7
      Accounts payable and accrued liabilities          1,005.9        980.8
      Income and other taxes payable                       65.2         68.8
      Dividends payable                                    38.1         34.5
      Long-term debt maturing within one year             248.4         31.0
                                                  ---------------------------
                                                        1,637.6      1,344.8

    Deferred liabilities                                  696.1        714.6
    Long-term debt (Note 11)                            4,140.4      4,146.2
    Future income taxes                                 1,770.3      1,701.5

    Shareholders' equity
      Share capital (Note 12)                           1,218.9      1,188.6
      Contributed surplus                                  41.3         42.4
      Accumulated other comprehensive
       income (Note 13)                                    53.5         39.6
      Retained income                                   4,491.6      4,187.3
                                                  ---------------------------
                                                        5,805.3      5,457.9
                                                  ---------------------------
    Total liabilities and shareholders' equity       $ 14,049.7   $ 13,365.0
                                                  ---------------------------
                                                  ---------------------------

    Commitments and contingencies (Note 19).
    See notes to interim consolidated financial statements.



    STATEMENT OF CONSOLIDATED CASH FLOWS
    (in millions of Canadian dollars)
                                                        For the three months
                                                          ended September 30
                                                           2008         2007
                                                    -------------------------
                                                             (unaudited)
    Operating activities
      Net income                                     $    172.7   $    218.6
      Add (deduct) items not affecting cash:
        Depreciation and amortization                     120.8        118.0
        Future income taxes                                29.9         72.1
        Change in estimated fair value of Canadian
         third party asset-backed commercial
         paper (Note 10)                                   28.1         21.5
        Foreign exchange losses (gains)
         on long-term debt                                  2.9        (64.3)
        Amortization of deferred charges                    2.3          3.0
        Equity income, net of cash received               (14.2)           -
      Restructuring and environmental remediation
       payments (Note 8)                                  (11.9)       (13.8)
      Other operating activities, net                     (47.6)       (14.2)
      Change in non-cash working capital balances
       related to operations                               (0.2)         0.5
                                                    -------------------------
      Cash provided by operating activities               282.8        341.4
                                                    -------------------------
    Investing activities
      Additions to properties                            (242.1)      (206.0)
      Additions to investments and other
       assets (Note 15)                                   (20.5)        (4.9)
      Additions to investment in Dakota, Minnesota &
       Eastern Railroad Corporation (Note 10)              (0.8)           -
      Net proceeds from disposal of
       transportation properties                           17.0          0.8
      Investment in Canadian third party
       asset-backed commercial paper (Note 10)                -       (143.6)
                                                    -------------------------
      Cash used in investing activities                  (246.4)      (353.7)
                                                    -------------------------
    Financing activities
      Dividends paid                                      (38.1)       (34.8)
      Issuance of CP Common Shares                          1.3          4.1
      Purchase of CP Common Shares                            -         (3.0)
      Net increase in short-term borrowing                 25.0            -
      Repayment of long-term debt                          (7.6)        (6.9)
                                                    -------------------------
    Cash used in financing activities                     (19.4)       (40.6)
                                                    -------------------------
    Cash position
      Increase (decrease) in cash
       and cash equivalents                                17.0        (52.9)
      Cash and cash equivalents
       at beginning of period                              80.9        392.1
                                                    -------------------------
    Cash and cash equivalents at end of period       $     97.9   $    339.2
                                                    -------------------------
                                                    -------------------------

    See notes to interim consolidated financial statements.



    STATEMENT OF CONSOLIDATED CASH FLOWS
    (in millions of Canadian dollars)
                                                         For the nine months
                                                          ended September 30
                                                           2008         2007
                                                    -------------------------
                                                             (unaudited)

    Operating activities
      Net income                                     $    418.4   $    603.9
      Add (deduct) items not affecting cash:
        Depreciation and amortization                     365.4        355.7
        Future income taxes                                57.8        168.3
        Change in estimated fair value of Canadian
         third party asset-backed commercial
         paper (Note 10)                                   49.4         21.5
        Foreign exchange losses (gains)
         on long-term debt                                 12.4       (161.5)
        Amortization of deferred charges                    7.4          9.2
        Equity income, net of cash received               (35.0)           -
      Restructuring and environmental remediation
       payments (Note 8)                                  (36.4)       (39.0)
      Other operating activities, net                     (43.2)       (16.0)
      Change in non-cash working capital balances
       related to operations (Note 9)                    (170.4)        (8.5)
                                                    -------------------------
      Cash provided by operating activities               625.8        933.6
                                                    -------------------------
    Investing activities
      Additions to properties                            (606.8)      (568.6)
      Additions to investments and other
       assets (Note 15)                                  (213.0)       (16.6)
      Additions to investment in Dakota, Minnesota &
       Eastern Railroad Corporation (Note 10)              (8.3)           -
      Net proceeds from disposal of
       transportation properties                           14.4          9.3
      Investment in Canadian third party
       asset-backed commercial paper (Note 10)                -       (143.6)
                                                    -------------------------
      Cash used in investing activities                  (813.7)      (719.5)
                                                    -------------------------
    Financing activities
      Dividends paid                                     (110.6)       (98.6)
      Issuance of CP Common Shares                         18.3         29.2
      Purchase of CP Common Shares                            -       (231.1)
      Net increase in short-term borrowing                 50.3            -
      Issuance of long-term debt (Note 11)              1,068.7        485.1
      Repayment of long-term debt                      (1,088.1)      (183.8)
      Settlement of treasury rate lock (Note 14)          (30.9)           -
                                                    -------------------------
      Cash (used in) provided by
       financing activities                               (92.3)         0.8
                                                    -------------------------
    Cash position
      (Decrease) increase in cash and
       cash equivalents                                  (280.2)       214.9
      Cash and cash equivalents at
       beginning of period                                378.1        124.3
                                                    -------------------------
      Cash and cash equivalents at end of period     $     97.9   $    339.2
                                                    -------------------------
                                                    -------------------------

    See notes to interim consolidated financial statements.



    CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
    (in millions of Canadian dollars)

                                                        For the three months
                                                          ended September 30
                                                           2008         2007
                                                    -------------------------
                                                             (unaudited)
    Share capital
    Balance, beginning of period                     $  1,216.9   $  1,182.0

    Shares issued under stock option plans                  2.0          5.2
                                                    -------------------------
    Balance, end of period                              1,218.9      1,187.2
                                                    -------------------------

    Contributed surplus
    Balance, beginning of period                           39.8         38.7

    Stock compensation expense                              1.5          1.9
                                                    -------------------------
    Balance, end of period                                 41.3         40.6
                                                    -------------------------
    Accumulated other comprehensive income
    Balance, beginning of period                           52.4         62.9

    Other comprehensive income (loss) (Note 13)             1.1         (9.1)
                                                    -------------------------
    Balance, end of period                                 53.5         53.8
                                                    -------------------------
    Retained income
    Balance, beginning of period                        4,356.9      3,694.9

    Net income for the period                             172.7        218.6

    Dividends                                             (38.0)       (34.0)

                                                    -------------------------
    Balance, end of period                              4,491.6      3,879.5
                                                    -------------------------

    Total accumulated other comprehensive income
     and retained income                                4,545.1      3,933.3
                                                    -------------------------
                                                    -------------------------
    Shareholders' equity, end of period              $  5,805.3   $  5,161.1
                                                    -------------------------
                                                    -------------------------

    See notes to interim consolidated financial statements.



    CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
    (in millions of Canadian dollars)

                                                         For the nine months
                                                          ended September 30
                                                           2008         2007
                                                    -------------------------
                                                             (unaudited)
    Share capital
    Balance, beginning of period                     $  1,188.6   $  1,175.7

    Shares issued under stock option plans                 30.3         36.0

    Shares purchased                                          -        (24.5)
                                                    -------------------------
    Balance, end of period                              1,218.9      1,187.2
                                                    -------------------------
    Contributed surplus
    Balance, beginning of period                           42.4         32.3
    Stock compensation expense                              8.3          9.0
    Stock compensation related to shares issued
     under stock option plans                              (9.4)        (0.7)
                                                    -------------------------
    Balance, end of period                                 41.3         40.6
                                                    -------------------------
    Accumulated other comprehensive income
    Balance, beginning of period                           39.6         66.4
    Adjustment for change in accounting policy                -         14.0
                                                    -------------------------
    Adjusted balance, beginning of period                  39.6         80.4
    Other comprehensive income (loss) (Note 13)            13.9        (26.6)
                                                    -------------------------
    Balance, end of period                                 53.5         53.8
                                                    -------------------------
    Retained income
    Balance, beginning of period                        4,187.3      3,582.1
    Adjustment for change in accounting policy                -          4.0
                                                    -------------------------
    Adjusted balance, beginning of period               4,187.3      3,586.1
    Net income for the period                             418.4        603.9
    Shares purchased                                          -       (206.6)
    Dividends                                            (114.1)      (103.9)
                                                    -------------------------
    Balance, end of period                              4,491.6      3,879.5
                                                    -------------------------
    Total accumulated other comprehensive income
     and retained income                                4,545.1      3,933.3
                                                    -------------------------
                                                    -------------------------
    Shareholders' equity, end of period              $  5,805.3   $  5,161.1
                                                    -------------------------
                                                    -------------------------

    See notes to interim consolidated financial statements.



    NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
    SEPTEMBER 30, 2008
    (unaudited)

    1   Basis of presentation

        These unaudited interim consolidated financial statements and notes
        have been prepared using accounting policies that are consistent with
        the policies used in preparing Canadian Pacific Railway Limited's
        ("CP", "the Company" or "Canadian Pacific Railway") 2007 annual
        consolidated financial statements, except as discussed below and in
        Note 2 for the adoption of new accounting standards. They do not
        include all disclosures required under Generally Accepted Accounting
        Principles ("GAAP") for annual financial statements and should be
        read in conjunction with the annual consolidated financial
        statements.

        CP's operations can be affected by seasonal fluctuations such as
        changes in customer demand and weather-related issues. This
        seasonality could impact quarter-over-quarter comparisons.

    2   New accounting changes

        Financial Instrument and Capital Disclosures

        The CICA has issued the following accounting standards effective for
        fiscal periods beginning in 2008: Section 3862 "Financial Instruments
        - Disclosures", Section 3863 "Financial Instruments - Presentation",
        and Section 1535 "Capital Disclosures".

        Section 3862 "Financial Instruments - Disclosures" and Section 3863
        "Financial Instruments - Presentation" revise disclosure requirements
        related to financial instruments, including hedging instruments.

        Section 1535 "Capital Disclosures" requires the Company to provide
        disclosures about the Company's capital and how it is managed.

        These new accounting standards have not impacted the amounts reported
        in the Company's financial statements; however, they have resulted in
        expanded note disclosure (see Note 14 and Note 20).

        Inventories

        The CICA has issued accounting standard Section 3031 "Inventories"
        which became effective January 1, 2008. Section 3031 "Inventories"
        provides guidance on the method of determining the cost of the
        Company's materials and supplies. The new accounting standard
        specifies that inventories are to be valued at the lower of cost and
        net realizable value. The standard requires the reversal of
        previously recorded write downs to realizable value when there is
        clear evidence that net realizable value has increased. The adoption
        of Section 3031 "Inventories" did not impact the Company's financial
        statements.

    3   Future accounting changes

        Goodwill and intangible assets

        In February 2008, the CICA issued accounting standard Section 3064
        "Goodwill and intangible assets", replacing accounting standard
        Section 3062 "Goodwill and other intangible assets" and accounting
        standard Section 3450 "Research and development costs". The new
        Section will be applicable on a retrospective basis with restatement
        to financial statements relating to fiscal years beginning on or
        after October 1, 2008. Accordingly, the Company will adopt the new
        standards for its fiscal year beginning January 1, 2009. Section 3064
        establishes standards for the recognition, measurement, presentation
        and disclosure of goodwill subsequent to its initial recognition and
        of intangible assets. Standards concerning goodwill are unchanged
        from the standards included in the previous Section 3062. The Company
        is currently evaluating the impact of the adoption of this new
        Section.

        International Financial Reporting Standards ("IFRS")

        On February 13, 2008, the Canadian Accounting Standards Board
        ("AcSB") confirmed that publicly accountable enterprises will be
        required to adopt IFRS in place of Canadian GAAP for interim and
        annual reporting purposes for fiscal years beginning on or after
        January 1, 2011. At this time the impact on the Company's future
        financial position and results of operations is not reasonably
        determinable or estimable. CP is currently developing appropriate
        accounting policies under IFRS and assessing the impact that these
        policy changes will have.

    4   Other charges

                                         For the three        For the nine
                                          months ended        months ended
                                          September 30        September 30
        (in millions)                    2008     2007       2008     2007
                                     -------------------  -------------------

        Amortization of discount on
         accruals recorded at present
         value                         $   1.5   $   2.0   $   4.6   $   6.2
        Other exchange (gains) losses     (0.7)      2.3       1.2       4.3
        Loss on sale of accounts
         receivable                          -       1.5       2.7       4.2
        Losses (gains) on non-hedging
         derivative instruments            0.3       0.5      (0.6)      0.1
        Other                              1.7       1.8       6.5       6.3
                                     -------------------  -------------------
        Total other charges            $   2.8   $   8.1   $  14.4   $  21.1
                                     -------------------  -------------------
                                     -------------------  -------------------

    5   Interest expense

                                         For the three       For the nine
                                          months ended       months ended
                                          September 30       September 30
        (in millions)                    2008     2007      2008     2007
                                     -------------------  -------------------

        Interest expense               $  66.2   $  51.5   $ 195.7   $ 152.6
        Interest income                   (1.7)     (6.6)     (8.4)    (11.7)
                                     -------------------  -------------------
        Total interest expense         $  64.5   $  44.9   $ 187.3   $ 140.9
                                     -------------------  -------------------
                                     -------------------  -------------------

    6   Income taxes

        During the nine months ended September 30, 2008, legislation was
        substantively enacted to reduce provincial income tax rates. As a
        result of these changes, the Company recorded a $15.7 million benefit
        in future tax liability and income tax expense for the nine months
        ended September 30, 2008, related to the revaluation of its future
        income tax balances as at December 31, 2007. For the three months
        ended September 30, 2008, no benefits were recorded.

        Cash taxes paid for the quarter ended September 30, 2008, were
        $4.9 million (three months ended September 30, 2007 - cash taxes
        refunded were $0.9 million). Cash taxes paid in the nine months ended
        September 30, 2008 were $62.8 million (nine months ended
        September 30, 2007 - $8.9 million).

    7   Earnings per share

        At September 30, 2008, the number of shares outstanding was
        153.8 million (September 30, 2007 - 153.2 million).

        Basic earnings per share have been calculated using net income for
        the period divided by the weighted average number of CP shares
        outstanding during the period.

        Diluted earnings per share have been calculated using the treasury
        stock method, which gives effect to the dilutive value of outstanding
        options.

        The number of shares used in earnings per share calculations is
        reconciled as follows:

                                          For the three        For the nine
                                           months ended        months ended
                                           September 30        September 30
        (in millions)                    2008      2007      2008      2007
                                     -------------------  -------------------
        Weighted average shares
         outstanding                     153.8     153.2     153.6     154.3
        Dilutive effect of stock
         options                           1.3       1.8       1.6       1.6
                                     -------------------  -------------------
        Weighted average diluted
         shares outstanding              155.1     155.0     155.2     155.9
                                     -------------------  -------------------
                                     -------------------  -------------------
        (in dollars)

        Basic earnings per share       $  1.12   $  1.43   $  2.72   $  3.91
        Diluted earnings per share     $  1.11   $  1.41   $  2.70   $  3.87
                                     -------------------  -------------------
                                     -------------------  -------------------

        For the three and nine months ended September 30, 2008, 1,227,750 and
        821,133 options were excluded from the computation of diluted
        earnings per share because their effects were not dilutive (three and
        nine months ended September 30, 2007 - 733 and 1,861 options).

    8   Restructuring and environmental remediation

        At September 30, 2008, the provision for restructuring and
        environmental remediation was $210.7 million (December 31, 2007 -
        $234.0 million). This provision primarily includes labour liabilities
        for restructuring plans. Payments are expected to continue in
        diminishing amounts until 2025. The environmental remediation
        liability includes the cost of a multi-year soil remediation program.

        Set out below is a reconciliation of CP's liabilities associated with
        restructuring and environmental remediation programs:

        Three months ended September 30, 2008

                                                                     Closing
                        Opening                    Amorti-           Balance
                        Balance                     zation   Foreign Septem-
                         July 1                         of  Exchange  ber 30
        (in millions)      2008  Accrued Payments Discount    Impact    2008
                        -----------------------------------------------------
        Labour liability
         for
         terminations
         and
         severances     $ 112.9        -     (8.8)     0.9      1.2  $ 106.2

        Other non-labour
         liabilities for
         exit plans         0.6        -     (0.1)       -        -      0.5
                        -----------------------------------------------------
        Total
         restructuring
         liability        113.5        -     (8.9)     0.9      1.2    106.7
                        -----------------------------------------------------

        Environmental
         remediation
         program          103.7      1.0     (3.0)       -      2.3    104.0
                        -----------------------------------------------------
        Total
         restructuring
         and
         environmental
         remediation
         liability      $ 217.2      1.0    (11.9)     0.9      3.5  $ 210.7
                        -----------------------------------------------------
                        -----------------------------------------------------

        Three months ended September 30, 2007

                                                                     Closing
                        Opening                    Amorti-           Balance
                        Balance                     zation   Foreign Septem-
                         July 1  Accrued                of  Exchange  ber 30
        (in millions)      2007 (reduced) Payments Discount    Impact    2007
                        -----------------------------------------------------
        Labour liability
         for
         terminations
         and
         severances     $ 163.6      0.5    (10.7)     1.5     (2.1) $ 152.8
        Other non-labour
         liabilities
         for exit plans     1.1     (0.2)    (0.1)       -        -      0.8
                        -----------------------------------------------------
        Total
         restructuring
         liability        164.7      0.3    (10.8)     1.5     (2.1)   153.6
                        -----------------------------------------------------
        Environmental
         remediation
         program          112.7      0.9     (3.0)       -     (3.9)   106.7
                        -----------------------------------------------------
        Total
         restructuring
         and
         environmental
         remediation
         liability      $ 277.4      1.2    (13.8)     1.5     (6.0) $ 260.3
                        -----------------------------------------------------
                        -----------------------------------------------------

        Nine months ended September 30, 2008

                                                                     Closing
                        Opening                    Amorti-           Balance
                        Balance                     zation   Foreign Septem-
                         July 1                         of  Exchange  ber 30
        (in millions)      2008  Accrued Payments Discount    Impact    2008
                        -----------------------------------------------------
        Labour liability
         for
         terminations
         and severances $ 129.2      1.5    (29.4)     3.1      1.8  $ 106.2
        Other non-labour
         liabilities for
         exit plans         0.8        -     (0.3)       -        -      0.5
                        -----------------------------------------------------
        Total
         restructuring
         liability        130.0      1.5    (29.7)     3.1      1.8    106.7
                        -----------------------------------------------------

        Environmental
         remediation
         program          104.0      2.9     (6.7)       -      3.8    104.0
                        -----------------------------------------------------
        Total
         restructuring
         and
         environmental
         remediation
         liability      $ 234.0      4.4    (36.4)     3.1      5.6  $ 210.7
                        -----------------------------------------------------
                        -----------------------------------------------------


        Nine months ended September 30, 2007

        (in millions)
                                                                     Closing
                        Opening                    Amorti-           Balance
                        Balance                     zation   Foreign Septem-
                         July 1  Accrued                of  Exchange  ber 30
        (in millions)      2007 (reduced) Payments Discount    Impact    2007
                        -----------------------------------------------------
        Labour liability
         for
         terminations
         and severances $ 187.4     (1.6)   (32.8)     4.7     (4.9) $ 152.8
        Other non-labour
         liabilities for
         exit plans         1.4     (0.2)    (0.2)       -     (0.2)     0.8
                        -----------------------------------------------------
        Total
         restructuring
         liability        188.8     (1.8)   (33.0)     4.7     (5.1)   153.6
                        -----------------------------------------------------

        Environmental
         remediation
         program          120.2      2.2     (6.0)       -     (9.7)   106.7
                        -----------------------------------------------------
        Total
         restructuring
         and
         environmental
         remediation
         liability      $ 309.0      0.4    (39.0)     4.7    (14.8) $ 260.3
                        -----------------------------------------------------
                        -----------------------------------------------------

        Amortization of Discount is charged to income as "Other Charges",
        "Compensation and Benefits" and "Purchased Services and Other" as
        applicable. New accruals and adjustments to previous accruals are
        reflected in "Compensation and Benefits" and "Purchased Services and
        Other" as applicable.

    9   Accounts Receivable

        As at March 31, 2008, the Company had an accounts receivable
        securitization program. Under the terms of the program, the Company
        sold an undivided co-ownership interest in $120.0 million of eligible
        freight receivables to an unrelated trust. In the second quarter of
        2008, the Company's accounts receivable securitization program was
        terminated and settled. As a result, the Company's Consolidated
        balance sheet, Accounts receivable and other current assets increased
        by $120.0 million and in the Statement of consolidated cash flows the
        Change in non-cash working capital balances related to operations
        reflected an outflow of $120.0 million. As well, the related
        servicing asset and liability which had previously been recognized
        are no longer required to be maintained and were settled as part of
        the termination.

    10  Investments

        Dakota, Minnesota & Eastern Railroad Corporation ("DM&E")

        On October 4, 2007, the Company acquired all of the issued and
        outstanding shares of DM&E. The Company is currently accounting for
        the purchase by the equity method until the effective date of the
        approval of the acquisition by the United States Surface
        Transportation Board ( "STB"). On September 30, 2008, the Company
        received regulatory approval for the acquisition from the STB
        effective October 30, 2008. The Company will consolidate its
        investment in DM&E subsequent to the effective date.

        The purchase price was a $1.496 billion cash payment, including a
        $6 million post closing adjustment in the first quarter of 2008, and
        transaction costs of $16 million incurred to September 30, 2008.
        Future contingent payments of up to approximately US$1.05 billion
        plus certain interest and inflationary adjustments may become payable
        up to December 31, 2025 upon achievement of certain milestones.

        The equity income from the Company's investment in DM&E, which is
        recorded net of tax, was $16.5 million during the three months ended
        September 30, 2008 and $40.9 million during the nine months ended
        September 30, 2008. The difference between cost and the net book
        value of DM&E at the date of acquisition was US$976.4 million. For
        the three months ended September 30, 2008 the equity income from the
        Company's investment in DM&E was reduced by $3.7 million to recognize
        additional depreciation expense based on the assigned cost using fair
        values at the date of acquisition and $0.5 million to recognize
        amortization of the fair value of intangible assets acquired. For the
        nine months ended September 30, 2008, the additional depreciation
        expense was $10.4 million and the amortization of intangible assets
        was $1.4 million.

        The following table reflects the revised purchase price allocation,
        based on the fair value of DM&E's assets and liabilities acquired at
        acquisition, which are subject to final valuations in the fourth
        quarter of 2008. The impact of these valuations is not expected to
        have a material effect on the results of operations.

        (in millions)                                        October 4, 2007
        ---------------------------------------------------------------------
        Current assets                                               $    93
        Railroad properties                                            1,943
        Intangible assets                                                 50
        Goodwill                                                         156
        Other assets                                                       2
                                                            -----------------
          Total assets acquired                                        2,244
                                                            -----------------
        Current liabilities                                              104
        Future income taxes                                              576
        Debt and other liabilities                                        68
                                                            -----------------
          Total liabilities assumed                                      748
                                                            -----------------
        Investment in net assets of DM&E                             $ 1,496
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Canadian Third Party Asset-backed Commercial Paper ("ABCP")

        At September 30, 2008, the Company held ABCP issued by a number of
        trusts with an original cost of $143.6 million. At the dates the
        Company acquired these investments they were rated R1 (High) by DBRS
        Limited ("DBRS"), the highest credit rating issued for commercial
        paper, and backed by R1 (High) rated assets and liquidity agreements.
        These investments matured during the third quarter of 2007 but, as a
        result of liquidity issues in the ABCP market, did not settle on
        maturity. As a result, the Company has classified its ABCP as long-
        term investments after initially classifying them as Cash and cash
        equivalents.

        On August 16, 2007, an announcement was made by a group representing
        banks, asset providers and major investors on an agreement in
        principle to a long-term proposal and interim agreement to convert
        the ABCP into long-term floating rate notes maturing no earlier than
        the scheduled maturity of the underlying assets. On September 6,
        2007, a pan-Canadian restructuring committee consisting of major
        investors was formed. The committee was created to propose a solution
        to the liquidity problem affecting the ABCP and has retained legal
        and financial advisors to oversee the proposed restructuring process.

        The ABCP in which the Company has invested has not traded in an
        active market since mid-August 2007 and there are currently no market
        quotations available.

        On March 17, 2008, a court order was obtained which commenced the
        process of restructuring the ABCP under the protection of the
        Companies' Creditors Arrangement Act ("CCAA"). A vote of the holders
        of the ABCP approving the restructuring occurred on April 25, 2008,
        and on June 25, 2008 a court order sanctioning the restructuring of
        the ABCP was made pursuant to the CCAA. All appeals of the sanction
        order have been dismissed or denied and it is now final.

        On March 20, 2008, the pan-Canadian restructuring committee issued an
        Information Statement containing details about the proposed
        restructuring. Based on this and other public information it is
        estimated that, of the $143.6 million of ABCP in which the Company
        has invested:

        -  $12.5 million is represented by traditional securitized assets and
           the Company will, on restructuring, receive replacement
           Traditional Asset (TA) Tracking long-term floating rate notes with
           a maturity of approximately eight and one-half years. As the
           underlying assets are primarily comprised of cash and Canadian
           Lines of Credit which are subject to an offer to repurchase at par
           value, the Company has assumed that these notes will be repaid in
           full significantly in advance of maturity;

        -  $117.7 million is represented by a combination of leveraged
           collateralized debt, synthetic assets and traditional securitized
           assets and the Company will, on restructuring, receive replacement
           senior Class A-1 and Class A-2 and subordinated Class B and Class
           C long-term floating rate notes with maturities of approximately
           eight years and nine months. The Company expects to receive
           replacement notes with par values as follows:

           -  Class A-1: $59.7 million
           -  Class A-2: $46.5 million
           -  Class B: $8.0 million
           -  Class C: $3.5 million

           The replacement senior notes are expected to obtain a AA rating
           while the replacement subordinated notes are likely to be unrated;
           and

        -  $13.4 million is represented by assets that have an exposure to US
           mortgages and sub-prime mortgages and assets that are held in a
           satellite trust that will be terminated when the restructuring is
           effective. On restructuring, the Company is likely to receive
           Ineligible Asset (IA) Tracking long-term floating rate notes with
           maturities of approximately between five years and three months
           and eight years and seven months. In addition, the Company will
           receive other tracking notes of approximately $1.2 million which
           are expected to be paid down when the restructuring is effective
           with recoveries of 5.9% of principal. Certain of these notes may
           be rated, although at this time the pan-Canadian restructuring
           committee has provided no indication of the rating these notes may
           receive. DBRS has indicated that certain IA tracking notes may be
           unrated.

        The valuation technique used by the Company to estimate the fair
        value of its investment in ABCP at September 30, 2008, incorporates
        probability weighted discounted cash flows considering the best
        available public information regarding market conditions and other
        factors that a market participant would consider for such
        investments. The assumptions used in determining the estimated fair
        value reflect the details included in the Information Statement
        issued by the pan-Canadian restructuring committee and the risks
        associated with the long-term floating rate notes. The interest rates
        and maturities of the various long-term floating rate notes, discount
        rates and credit losses modelled are:

        Probability weighted average interest rate  3.6 per cent
        Weighted average discount rate              8.1 per cent
        Maturity of long-term floating rate notes   five to nine years, other
                                                    than certain tracking
                                                    notes to be paid down on
                                                    restructuring
        Credit losses rated                         notes(1): nil to
                                                    55 percent
                                                    unrated notes(2): 15 to
                                                    100 percent

        (1) TA Tracking, Class A-1 and Class A-2 senior notes and IA Tracking
            notes.
        (2) Class B and Class C subordinated notes and other tracking notes.

        Interest rates and credit losses vary by each of the different
        replacement long-term floating rate notes to be issued as each has
        different credit ratings and risks. Interest rates and credit losses
        also vary by the different probable cash flow scenarios that have
        been modelled.

        Discount rates vary dependent upon the credit rating of the
        replacement long-term floating rate notes. Discount rates have been
        estimated using Government of Canada benchmark rates plus expected
        spreads for similarly rated instruments with similar maturities and
        structure.

        Maturities vary by different replacement long-term floating rate
        notes as a result of the expected maturity of the underlying assets.

        One of the cash flow scenarios modelled is a liquidation scenario
        whereby, if the restructuring is not successfully completed, recovery
        of the Company's investment is through the liquidation of the
        underlying assets of the ABCP trusts. In addition, while the
        likelihood is remote, there remains a possibility that a liquidation
        scenario may occur even with a successful approval of the
        restructuring plan.

        In addition, assumptions have also been made as to the amount of
        restructuring costs that the Company will bear.

        The probability weighted discounted cash flows resulted in an
        estimated fair value of the Company's ABCP of $72.7 million at
        September 30, 2008, excluding $6.1 million of accrued interest, which
        has been recognized separately in the balance sheet. This represents
        a reduction in the estimated fair value of $28.1 million from
        June 30, 2008 as a result of the worsening credit markets and
        expected termination of certain tracking notes. In addition, it
        represents a reduction of $49.4 million from the estimated fair value
        at December 31, 2007. Charges to income of $28.1 million before tax
        ($19.8 million after tax) and $21.3 million before tax ($15.0 million
        after tax) were recorded in the third and the first quarters of 2008,
        respectively. These represent 20 percent and 15 percent of the
        original value, bringing the total write-down to an aggregate of
        approximately 49 percent of the original value, or 47 percent of the
        original value plus accrued interest. In addition, a charge to income
        of $21.5 million ($15 million after tax), representing approximately
        15 percent of the original value, was recorded in the third quarter
        of 2007.

        Sensitivity analysis is presented below for key assumptions:

                                                                   Change in
                                                                  fair value
        (in millions)                                                of ABCP
                                                                  -----------
        Probability of successful restructuring
          1 percent increase                                         $   0.1
          1 percent decrease                                         $  (0.1)

        Interest rate
          50 basis point increase                                    $   2.5
          50 basis point decrease                                    $  (2.5)

        Discount rate
          50 basis point increase                                    $  (2.2)
          50 basis point decrease                                    $   2.3
                                                                  -----------

        Continuing uncertainties regarding the value of the assets which
        underlie the ABCP, the amount and timing of cash flows and the
        outcome of the restructuring process could give rise to a further
        material change in the value of the Company's investment in ABCP
        which could impact the Company's near term earnings.

    11  Long-term debt

        During the second quarter of  2008, the Company issued US$400 million
        5.75% 5-year notes, US$300 million 6.50% 10-year notes and
        CDN$375 million 6.25% 10-year notes. Net proceeds from these
        offerings were CDN$1,068.7 million. The notes are unsecured, but
        carry a negative pledge. The proceeds from these offerings were used
        to partially repay the bridge financing.

    12  Shareholders' equity

        An analysis of Common Share balances is as follows:

                                         For the three        For the nine
                                          months ended        months ended
                                          September 30        September 30
        (in millions)                    2008     2007       2008     2007
                                      ---------------------------------------
        Share capital, beginning of
         period                          153.8     153.1     153.3     155.5
        Shares issued under stock
         option plans                        -       0.1       0.5       0.9
        Shares purchased                     -         -         -      (3.2)
                                      ---------------------------------------

        Share capital, end of period     153.8     153.2     153.8     153.2
                                      ---------------------------------------
                                      ---------------------------------------

        For the nine months ended September 30, 2008, there were no shares
        repurchased (for the nine months ended September 30, 2007,
        3.2 million shares were purchased at an average price per share of
        $71.99).

        Purchases are made at the market price on the day of purchase, with
        consideration allocated to share capital up to the average carrying
        amount of the shares, and any excess allocated to retained earnings.
        When shares are purchased, it takes three days before the transaction
        is settled and the shares are cancelled. The cost of shares purchased
        in a given month and settled in the following month is accrued in the
        month of purchase.

    13  Other comprehensive income and accumulated other comprehensive income

        Components of other comprehensive income and the related tax effects
        are as follows:

                                                  For the three months ended
                                                          September 30
        (in millions)                                         2008
                                                            Income
                                                  Before       tax    Income
                                                     tax  (expense)      tax
                                                  amount  recovery    amount
                                                -----------------------------
        Unrealized foreign exchange loss on
         translation of U.S. dollar-denominated
         long-term debt designated as a hedge of
         the net investment in U.S. subsidiaries $ (57.8)  $   7.9   $ (49.9)

        Unrealized foreign exchange gain on
         translation of the net investment in
         U.S. subsidiaries                          60.0         -      60.0

        Realized gain on cash flow hedges
         settled in the period                      (3.5)      1.0      (2.5)

        Increase in unrealized holding losses on
         cash flow hedges                           (7.7)      2.3      (5.4)

        Realized gain on cash flow hedges settled
         in prior periods                           (0.1)     (1.0)     (1.1)
                                                -----------------------------

        Other comprehensive (loss) income        $  (9.1)  $  10.2   $   1.1
                                                -----------------------------
                                                -----------------------------

                                                  For the three months ended
                                                          September 30
        (in millions)                                         2007
                                                            Income
                                                  Before       tax    Net of
                                                     tax  (expense)      tax
                                                  amount  recovery    amount
                                                -----------------------------
        Unrealized foreign exchange gain on
         translation of U.S. dollar-denominated
         long-term debt designated as a hedge of
         the net investment in U.S. subsidiaries $  29.8   $ (4.6)   $  25.2

        Unrealized foreign exchange loss on
         translation of the net investment in
         U.S. subsidiaries                         (30.5)       -      (30.5)

        Realized gain on cash flow hedges settled
         in the period                              (3.1)     1.1       (2.0)

        Decrease in unrealized holding gains on
         cash flow hedges                           (2.7)     1.0       (1.7)

        Realized gain on cash flow hedges settled
         in prior periods                           (0.1)       -       (0.1)
                                                -----------------------------

        Other comprehensive loss                 $  (6.6)  $ (2.5)   $  (9.1)
                                                -----------------------------
                                                -----------------------------


                                                   For the nine months ended
        (in millions)                                         2008
                                                            Income
                                                  Before       tax    Income
                                                     tax  (expense)      tax
                                                  amount  recovery    amount
                                                -----------------------------

        Unrealized foreign exchange loss on
         translation of U.S. dollar-denominated
         long-term debt designated as a hedge of
         the net investment in U.S. subsidiaries $ (92.8)  $  12.6   $ (80.2)

        Unrealized foreign exchange gain on
         translation of the net investment in U.S.
         subsidiaries                               97.2         -      97.2

        Realized gain on cash flow hedges settled
         in the period                             (12.4)      3.7      (8.7)

        Decrease in unrealized holding losses on
         cash flow hedges                            7.5      (2.9)      4.6

        Realized loss on cash flow hedges settled
         in prior periods                            1.5      (0.5)      1.0
                                                -----------------------------

        Other comprehensive income               $   1.0   $  12.9   $  13.9
                                                -----------------------------
                                                -----------------------------

                                                  For the nine months ended
                                                          September 30
        (in millions)                                         2007
                                                            Income
                                                  Before       tax    Net of
                                                     tax  (expense)      tax
                                                  amount  recovery    amount
                                                -----------------------------
        Unrealized foreign exchange gain on
         translation of U.S. dollar-denominated
         long-term debt designated as a hedge of
         the net investment in U.S. subsidiaries $  67.5   $ (10.4)  $  57.1

        Unrealized foreign exchange loss on
         translation of the net investment in
         U.S. subsidiaries                         (71.4)        -     (71.4)

        Realized gain on cash flow hedges
         settled in the period                     (11.2)      3.9      (7.3)

        Decrease in unrealized holding gains on
         cash flow hedges                           (9.2)      3.2      (6.0)

        Realized loss on cash flow hedges
         settled in prior periods                    1.5      (0.5)      1.0
                                                -----------------------------

        Other comprehensive loss                 $ (22.8)  $  (3.8)  $ (26.6)
                                                -----------------------------
                                                -----------------------------

        Changes in the balances of each classification within Accumulated
        other comprehensive income are as follows:

        Accumulated other comprehensive income

        Three months ended September 30, 2008
                                                 Opening             Closing
                                                 Balance,            Balance,
                                                  July 1,   Period  Sept. 30,
        (in millions)                               2008    change      2008
                                                -----------------------------
        Foreign exchange gain on U.S. dollar debt
         designated as a hedge of the net
         investment in U.S. subsidiaries         $ 266.3   $ (49.9)  $ 216.4

        Foreign exchange loss on net investment
         in U.S. subsidiaries                     (209.7)     60.0    (149.7)

        Unrealized effective losses on cash flow
         hedges                                     (2.4)     (7.9)    (10.3)

        Deferred loss on settled hedge instruments  (1.8)     (1.1)     (2.9)
                                                -----------------------------

        Accumulated other comprehensive income   $  52.4   $   1.1   $  53.5
                                                -----------------------------
                                                -----------------------------

        Three months ended September 30, 2007
                                                 Opening             Closing
                                                 Balance,            Balance,
                                                  July 1,   Period  Sept. 30,
        (in millions)                               2007    change      2007
                                                -----------------------------
        Foreign exchange gain on U.S. dollar debt
         designated as a hedge of the net
         investment in U.S. subsidiaries         $ 267.2   $  25.2   $ 292.4

        Foreign exchange loss on net investment
         in U.S. subsidiaries                     (209.4)    (30.5)   (239.9)

        Unrealized effective gains on cash flow
         hedges                                      9.3      (3.7)      5.6

        Deferred loss on settled hedge instruments  (4.2)     (0.1)     (4.3)
                                                -----------------------------

        Accumulated other comprehensive income   $  62.9   $  (9.1)  $  53.8
                                                -----------------------------
                                                -----------------------------

        Accumulated other comprehensive income

        Nine months ended September 30, 2008

                                                 Opening             Closing
                                                 Balance,            Balance,
                                                  Jan. 1,   Period  Sept. 30,
        (in millions)                               2008    change      2008
                                                -----------------------------
        Foreign exchange gain on U.S. dollar
         debt designated as a hedge of the net
         investment in U.S. subsidiaries         $ 296.6   $ (80.2)  $ 216.4

        Foreign exchange loss on net investment
         in U.S. subsidiaries                     (246.9)     97.2    (149.7)

        Unrealized effective losses on cash flow
         hedges                                     (6.2)     (4.1)    (10.3)

        Deferred loss on settled hedge instruments  (3.9)      1.0      (2.9)
                                                -----------------------------

        Accumulated other comprehensive income   $  39.6   $  13.9   $  53.5
                                                -----------------------------
                                                -----------------------------

        Nine months ended September 30, 2007

                                    Adjustment
                                           for
                                        change  Adjusted
                             Opening        in   Opening             Closing
                             Balance, account-   Balance,            Balance,
                              Jan. 1,      ing    Jan. 1,   Period  Sept. 30,
        (in millions)           2007    policy      2007    change      2007
                             ------------------------------------------------
        Foreign exchange gain
         on U.S. dollar debt
         designated as a
         hedge of the net
         investment in U.S.
         subsidiaries        $ 234.9   $   0.4   $ 235.3   $  57.1   $ 292.4

        Foreign exchange loss
         on net investment in
         U.S. subsidiaries    (168.5)        -    (168.5)    (71.4)   (239.9)

        Unrealized effective
         gains of cash flow
         hedges                    -      18.9      18.9     (13.3)      5.6

        Deferred loss on
         settled hedge
         instruments               -      (5.3)     (5.3)      1.0      (4.3)
                             ------------------------------------------------
        Accumulated other
         comprehensive
         income              $  66.4   $  14.0   $  80.4   $ (26.6)  $  53.8
                             ------------------------------------------------
                             ------------------------------------------------

        During the next twelve months, the Company expects $10.3 million of
        unrealized holding gains on derivative instruments to be realized and
        recognized in the Statement of Consolidated Income. Existing
        derivative instruments designated as cash flow hedges will be fully
        matured by December 31, 2009.

    14  Financial instruments

        The fair value of a financial instrument is the amount of
        consideration that would be agreed upon in an arm's length
        transaction between willing parties. The Company uses the following
        methods and assumptions to estimate fair value of each class of
        financial instruments for which carrying amounts are included in the
        Consolidated Balance Sheet as follows:

        Loans and receivables
        ---------------------
        Accounts receivable and other current assets - The carrying amounts
        approximate fair value because of the short maturity of these
        instruments.

        Investments - Long-term receivable balances are carried at amortized
        cost based on an initial fair value as determined at the time using
        discounted cash flow analysis and observable market based inputs.

        Financial liabilities
        ---------------------
        Accounts payable and accrued liabilities, short-term borrowings, and
        deferred liabilities - The carrying amounts approximate fair value
        because of the short maturity of these instruments.

        Long-term debt - The carrying amount of long-term debt is at
        amortized cost based on an initial fair value as determined at the
        time using the quoted market prices for the same or similar debt
        instruments.

        Available for sale
        ------------------
        Investments - Certain equity investments which are recorded on a cost
        basis have a carrying value that equals cost as fair value cannot be
        reliably established as there are no quoted prices in an active
        market for these investments.

        Held for trading
        ----------------
        Derivative instruments that are designated as hedging instruments are
        measured at fair value determined using the quoted market prices for
        the same or similar instruments. Derivative instruments that are not
        designated in hedging relationships are classified as held for
        trading and measured at fair value determined by using quoted market
        prices for similar instruments and changes in fair values of such
        derivatives are recognized in net income as they arise.

        Cash and cash equivalents - The carrying amounts approximate fair
        value because of the short maturity of these instruments.

        Investments - Canadian third party asset-backed commercial paper
        (ABCP) is carried at fair value, which has been determined using
        valuation techniques that incorporate probability weighted discounted
        future cash flows reflecting market conditions and other factors that
        a market participant would consider (see Note 10).

        The table below reconciles carrying value positions of the Company's
        financial instruments with Consolidated Balance Sheet categories:

        (in millions)                                September 30, 2008
                                               ------------------------------
                                                Carrying  Carrying
                                                Value of  Value of
                                               Financial     Other
                                                Assets /  Assets /   Balance
                                                  Liabi-    Liabi-     Sheet
                                                  lities    lities    Amount
                                               ------------------------------
        Assets
        Cash and cash equivalents                $  97.9   $     -   $  97.9
                                               ------------------------------
        Accounts receivable and other current
         assets
          Accounts receivable                      681.7         -
          Current portion of crude oil swaps        11.7         -
          Current portion of interest rate swaps     3.8         -
          Other                                        -      49.8
                                               ------------------------------
                                                   697.2      49.8     747.0
                                               ------------------------------
        Investments
          Equity investments at cost                 1.4         -
          Long-term receivables at amortized cost   10.7         -
          ABCP                                      72.7         -
          Other                                        -   1,689.7
                                               ------------------------------
                                                    84.8   1,689.7   1,774.5
                                               ------------------------------
        Other assets and deferred charges
        Long-term portion of crude oil swaps         3.0         -
        Long-term portion of currency forward        3.5         -
          Long-term portion of interest rate
           swaps                                     4.5         -
          Other                                        -   1,499.5
                                               ------------------------------
                                                    11.0   1,499.5   1,510.5
                                               ------------------------------
        Liabilities
        Short-term borrowings                    $ 280.0         -   $ 280.0
                                               ------------------------------
        Accounts payable and accrued liabilities
          Accounts payable and accrued
           liabilities                             765.9         -
          Current portion of foreign exchange
           contracts on fuel                         1.1         -
          Current portion of treasury rate lock        -         -
          Current portion of interest rate swaps       -         -
          Total return swap                         25.7         -
          Other                                        -     213.2
                                               ------------------------------
                                                   792.7     213.2   1,005.9
                                               ------------------------------

        Long-term debt maturing within one year    248.4         -     248.4
                                               ------------------------------
        Deferred liabilities
          Long-term portion of foreign exchange
           contracts on fuel                         0.3         -
          Long-term portion of currency forward        -         -
          Long-term portion of interest rate
           swaps                                       -         -
          Total return swap                            -         -
          Long-term portion of Accounts payable
           and accrued liabilities                  39.6         -
          Other                                        -     656.2
                                               ------------------------------
                                                    39.9     656.2     696.1
                                               ------------------------------
        Long-term debt                           4,140.4         -   4,140.4
                                               ------------------------------

        (in
        millions)                                      December 31, 2007
                                               -----------------------------
                                                Carrying  Carrying
                                                Value of  Value of
                                               Financial     Other
                                                Assets /  Assets /   Balance
                                                  Liabi-    Liabi-     Sheet
                                                  lities    lities    Amount
                                               ------------------------------
        Assets
        Cash and cash equivalents                $ 378.1   $     -   $ 378.1
                                               ------------------------------
        Accounts receivable and other current
         assets
          Accounts receivable                      483.0         -
          Current portion of crude oil swaps        12.9         -
          Current portion of interest rate swaps       -         -
          Other                                        -      46.9
                                               ------------------------------
                                                   495.9      46.9     542.8
                                               ------------------------------
        Investments
          Equity investments at cost                 1.3         -
          Long-term receivables at amortized cost   17.5         -
          ABCP                                     122.1         -
          Other                                        -   1,527.7
                                               ------------------------------
                                                   140.9   1,527.7   1,668.6
                                               ------------------------------
        Other assets and deferred charges
        Long-term portion of crude oil swaps         8.5         -
        Long-term portion of currency forward          -         -
          Long-term portion of interest rate
           swaps                                       -         -
          Other                                        -   1,227.1

                                               ------------------------------
                                                     8.5   1,227.1   1,235.6
                                               ------------------------------
        Liabilities
        Short-term borrowings                    $ 229.7         -   $ 229.7
                                               ------------------------------
        Accounts payable and accrued liabilities
          Accounts payable and accrued
           liabilities                             750.6         -
          Current portion of foreign exchange
           contracts on fuel                         2.1         -
          Current portion of treasury rate lock     30.6         -
          Current portion of interest rate swaps    (1.0)        -
          Total return swap                            -         -
          Other                                        -     198.5
                                               ------------------------------
                                                   782.3     198.5     980.8
                                               ------------------------------
        Long-term debt maturing within one year     31.0         -      31.0
                                               ------------------------------
        Deferred liabilities
          Long-term portion of foreign exchange
           contracts on fuel                         1.5         -
          Long-term portion of currency forward     15.7         -
          Long-term portion of interest rate
           swaps                                    (4.5)        -
          Total return swap                          3.8         -
          Long-term portion of Accounts payable
           and accrued liabilities                  41.9         -
          Other                                        -     656.2

                                               ------------------------------
                                                    58.4     656.2     714.6
                                               ------------------------------
        Long-term debt                           4,146.2         -   4,146.2
                                               ------------------------------

        Carrying value and fair value of financial instruments
        ------------------------------------------------------
        The carrying values of financial instruments equal or approximate
        their fair values with the exception of long-term debt which has a
        carrying value of $4,388.8 million at September 30, 2008
        (December 31, 2007 - $4,177.2 million) and a fair value of
        approximately $4,302.1 million at September 30, 2008 (December 31,
        2007 - $4,302.6 million). The fair value of publicly traded long-term
        debt is determined based on market prices at September 30, 2008 and
        December 31, 2007, respectively. The fair value of other long-term
        debt is estimated based on rates currently available to the Company
        for long-term borrowings, with terms and conditions similar to those
        borrowings in place at the applicable Consolidated Balance Sheet
        date.

        Financial risk management
        -------------------------
        In the normal course of operations, the Company is exposed to various
        market risks such as foreign exchange risk, interest rate risk, other
        price risk, as well as credit risk and liquidity risk. To manage
        these risks, the Company utilizes a Financial Risk Management (FRM)
        framework. The FRM goals and strategy are outlined below:

        FRM objectives:
        -  Maintaining sound financial condition as an ongoing entity;
        -  Optimizing earnings per share and cash flow;
        -  Financing operations of the group of CP companies at the optimal
           cost of capital; and
        -  Ensuring liquidity to all Canadian and U.S. operations.

        In order to satisfy the objectives above, the Company has adopted the
        following strategies:
        -  Prepare multi-year planning and budget documents at prevailing
           market rates to ensure clear, corporate alignment to performance
           management and achievement of targets;
        -  Measure the extent of operating risk within the business;
        -  Identify the magnitude of the impact of market risk factors on the
           overall risk of the business and take advantage of natural risk
           reductions that arise from these relationships; and
        -  Utilize financial instruments, including derivatives to manage the
           remaining residual risk to levels that fall within the risk
           tolerance of the Company.

        Under the governance structure established by the Company and
        approved by the Audit, Finance and Financial Risk Management
        Committee ("Audit Committee"), the Board of Directors has the
        authority to approve the Financial Risk Management Policies of the
        Company. The Board has delegated to the Audit Committee the
        accountability for ensuring a structure is in place to ensure
        compliance with the individual Corporate Risk Management Policies
        across the Company's operations.

        The policy objective with respect to the utilization of derivative
        financial instruments is to selectively mitigate the impact of
        fluctuations in foreign exchange ("FX") rates, interest rates, fuel
        price, and share price. The use of any derivative instruments is
        carried out in accordance with approved trading limits and authorized
        counterparties as specified in the policy and/or mandate. It is not
        the Company's intent to use financial derivatives or commodity
        instruments for trading or speculative purposes.

        Risk factors
        ------------
        The following is a discussion of market, credit and liquidity risks
        and related mitigation strategies that have been identified through
        the FRM framework. This is not an exhaustive list of all risks, nor
        will the mitigation strategies eliminate all risks listed. Risks
        related to the Company's investment in ABCP are discussed in more
        detail in Note 10.

        Foreign exchange risk
        ---------------------
        This risk refers to the fluctuation of financial commitments, assets,
        liabilities, income or cash flows due to changes in FX rates. The
        Company conducts business transactions and owns assets in both Canada
        and the United States; as a result, revenues and expenses are
        incurred in both Canadian dollars and U.S. dollars. The Company's
        income is exposed to FX risk largely in the following ways:

        -  Translation of U.S. dollar denominated revenues and expenses into
           Canadian dollars - When the Canadian dollar changes relative to
           the U.S. dollar, income reported in Canadian dollars will change.
           The impact of a strengthening Canadian dollar on U.S. dollar
           revenues and expenses will reduce net income because the Company
           has more U.S. dollar revenues than expenses. This impact is
           excluded from the sensitivity in the table below; and
        -  Translation of U.S. dollar denominated debt and other monetary
           items - A strengthening Canadian dollar will reduce the Company's
           U.S. dollar denominated debt in Canadian dollar terms and generate
           a FX gain on long-term debt, which is recorded in income. The
           Company calculates FX on long-term debt using the difference in FX
           rates at the beginning and at the end of each reporting period.
           Other U.S. dollar denominated monetary items will also be impacted
           by changes in FX rates.

        Foreign exchange management

        In terms of net income, excluding FX on long-term debt, mitigation of
        U.S. dollar FX exposure is provided primarily through offsets created
        by revenues and expenses incurred in the same currency. Where
        appropriate the Company negotiates with U.S. customers and suppliers
        to reduce the net exposure. The Company may from time to time reduce
        residual exposure by hedging revenues through FX forward contracts.
        The Company had no revenue forward sales of U.S. dollars outstanding
        at September 30, 2008.

        The FX gains and losses on long-term debt are mainly unrealized and
        can only be realized when U.S. dollar denominated long-term debt
        matures or is settled. The Company also has long-term FX exposure on
        its investment in U.S. affiliates. A portion of the Company's U.S.
        dollar denominated long-term debt has been designated as a hedge of
        the net investment in self-sustaining foreign subsidiaries. This
        designation has the effect of mitigating volatility on net income by
        offsetting long-term FX gains and losses on long-term debt. In
        addition, for long-term debt denominated in U.S. dollars in Canada,
        the Company may enter into currency forwards to hedge debt that is
        denominated in U.S. dollars.

        Occasionally the Company will enter into short-term FX forward
        contracts as part of its cash management strategy.

        The table below depicts the quarterly impact to net income and other
        comprehensive income of long-term debt, including currency forward
        contracts on long-term debt, had the exchange rate increased or
        decreased by one cent. The impact on other U.S. dollar denominated
        monetary items is not considered to be material.

            (in millions)                                 Three months ended
                                                          September 30, 2008
                                                        ---------------------
                                                                      Impact
                                                                    to Other
                                                                    compreh-
                                                         Impact to    ensive
                                                        Net income    income
                                                        ---------------------
            1 cent strengthening in Canadian dollar        $  (1.6)  $  (2.2)
            1 cent weakening in Canadian dollar                1.6       2.2
                                                        ---------------------

          Note: All variables excluding FX are held constant. Impact to net
          income would be decreased by $11.2 million and to other
          comprehensive income would be increased by $11.2 million if the net
          investment hedge was not included in the above table.

        Foreign exchange forward contracts

        In June 2007, the Company entered into a currency forward to fix the
        exchange rate on US$400 million 6.250% Notes due 2011. This
        derivative guarantees the amount of Canadian dollars that the Company
        will repay when its US$400 million 6.25% note matures in October
        2011. During the three and nine months ended September 30, 2008, the
        Company recorded a gain on this derivative of $15.0 million and
        $19.2 million, respectively, in "Foreign exchange (gain) loss on
        long-term debt". For the three months ended September 30, 2007, the
        Company recorded a loss of $17.6 million and a loss of $19.6 million
        for the nine months ended September 30, 2007. At September 30, 2008,
        the unrealized gain on the forward was $3.5 million (December 31,
        2007 - unrealized loss of $15.7 million).

        Interest rate risk
        ------------------
        This refers to the risk that the fair value or income and future cash
        flows of a financial instrument will vary as a result of changes in
        market interest rates.

        In order to manage funding needs or capital structure goals, the
        Company enters into debt or capital lease agreements that are subject
        to either fixed market interest rates set at the time of issue or
        floating rates determined by on-going market conditions. Debt subject
        to variable interest rates exposes the Company to variability in
        interest expense, while debt subject to fixed interest rates exposes
        the Company to variability in the fair value of the debt.

        The table below depicts the exposure to floating and fixed interest
        rates for all financial assets and liabilities:

          (in millions)                                   September 30, 2008
                                                          -------------------
                                                                At        At
                                                          floating     fixed
                                                          interest  interest
                                                             rates     rates
                                                          -------------------
          Financial assets
          Cash and short-term investments                  $  97.9   $     -
          ABCP                                                72.7         -

          Financial liabilities
          Short-term borrowings                              280.0         -
          Long-term debt(1)                                  569.6   3,819.2
                                                          -------------------

          (1) Includes impact of interest rate swaps

        Interest rate management

        To manage interest rate exposure, the Company accesses diverse
        sources of financing and manages borrowings in line with a targeted
        range of capital structure, debt ratings, liquidity needs, maturity
        schedule, and currency and interest rate profiles. In anticipation of
        future debt issuance, the Company may enter into forward rate
        agreements such as treasury rate locks, bond forwards or forward
        starting swaps to substantially lock in all or a portion of the
        effective future interest expense. The Company may also enter into
        swap agreements to manage the mix of fixed and floating rate debt.

        The table below depicts the quarterly impact to net income and other
        comprehensive income had interest rates increased or decreased by 50
        basis points. Typically, as rates increase, net income decreases.

                                                          Three months ended
          (in millions)                                   September 30, 2008
                                                          -------------------
                                                               Impact to
                                                              Net income
                                                          -------------------
          50 basis point increase in rates                           $  (0.5)
          50 basis point decrease in rates                               0.5
                                                          -------------------

          Note: All variables excluding interest rates are held constant.

        At September 30, 2008, the Company had outstanding interest rate swap
        agreements, classified as a fair value hedge, for a notional amount
        of US$200 million or $212.8 million. The swap agreements convert a
        portion of the Company's fixed-interest-rate liability into a
        variable-rate liability for the 6.250% Notes. During the three months
        ended September 30, 2008, the Company recorded a gain of $1.0 million
        and a gain of $2.1 million for the nine months ended September 30,
        2008, to "Interest expense". For the three months ended September 30,
        2007, the Company recorded a loss of $0.3 million and a loss of
        $1.1 million for the nine months ended September 30, 2007. At
        September 30, 2008, the unrealized gain, derived from the fair value
        of the swap, was $8.2 million (December 31, 2007 - $5.5 million).

        The following table discloses the terms of the swap agreements at
        September 30, 2008:

          Expiration                                        October 15, 2011
          Notional amount of principal (in CDN$ millions)          $   212.8
          Fixed receiving rate                                        6.250%
          Variable paying rate - three months ended
          September 30, 2008                                          4.570%
          -------------------------------------------------------------------

          Based on U.S. three-month LIBOR.

        During 2007, the Company entered into derivative agreements, which
        were designated as cash flow hedges, that established the benchmark
        rate on $350.0 million of 30 year debt that was expected to be
        issued. These hedges were de-designated on May 13, 2008 when it was
        no longer probable that the Company would issue 30 year debt. On May
        23, 2008, the fair value of these instruments was a loss of
        $30.9 million at the time of the issuance of the debt and the
        settlement of the derivative instrument. A gain of $1.3 million from
        the date of de-designation to the date of settlement of the
        derivative instrument was recorded in net income. Prior to de-
        designation losses of $1.3 million due to some ineffectiveness were
        recognized and recorded in net income during 2008. Effective hedge
        losses of $28.7 million will be deferred in accumulated other
        comprehensive income and will be amortized in earnings as an
        adjustment to interest expense.

        Stock-based compensation risk
        -----------------------------
        This risk refers to the probability of increased compensation expense
        due to the increase in the Company's share price.

        The Company's compensation expense is subject to volatility due to
        the movement of share price and its impact on the value of certain
        management and director stock-based compensation programs. These
        programs, as described in the management proxy circular, include
        deferred share units, restricted share units, performance share units
        and share appreciation rights. As the share price appreciates, these
        instruments are marked to market increasing compensation expense.

        Stock-based compensation expense management

        To minimize the volatility to compensation expense created by changes
        in share price, the Company entered into a Total Return Swap ("TRS")
        to reduce the volatility and total cost to the Company over time of
        the four types of stock-based compensation programs noted above.
        These are derivatives that provide price appreciation and dividends,
        in return for a charge by the counterparty. The swaps minimize
        volatility to compensation expense by providing a gain to
        substantially offset increased compensation expense as the share
        price increases and a loss to offset reduced compensation expense
        when the share price falls. If stock-based compensation share units
        fall out of the money after entering the program, the loss associated
        with the swap would no longer be offset by any compensation expense
        reductions.

        The table below depicts the quarterly impact to net income as a
        result of the TRS had the share price increased or decreased $1 from
        the closing share price on September 30, 2008.

          (in millions)                                   Three months ended
                                                          September 30, 2008
                                                          -------------------
                                                               Impact to
                                                              Net income
                                                          -------------------
          $1 increase in share price                                 $   1.7
          $1 decrease in share price                                    (1.7)
                                                          -------------------
          Note: All variables excluding share price are held constant.

        During the three months ended September 30, 2008, Compensation and
        benefits expense increased by $27.9 million and $21.9 million for the
        nine months ended September 30, 2008 due to unrealized losses for
        these swaps. For the three months ended September 30, 2007, the
        Company recorded an unrealized loss of $10.0 million and an
        unrealized gain of $12.8 million for the nine months ended September
        30, 2007. At September 30, 2008, the unrealized loss on the swap was
        $25.7 million (December 31, 2007 - unrealized loss of $3.8 million).

        Commodity risk
        --------------
        The Company is exposed to commodity risk related to purchases of
        diesel fuel and the potential reduction in net income due to
        increases in the price of diesel. Because fuel expense constitutes a
        large portion of the Company's operating costs, volatility in diesel
        fuel prices can have a significant impact on the Company's income.
        Items affecting volatility in diesel prices include, but are not
        limited to, fluctuations in world markets for crude oil and
        distillate fuels, which can be affected by supply disruptions and
        geopolitical events.

        Fuel price management

        The impact of variable fuel expense is mitigated substantially
        through fuel recovery programs which apportion incremental changes in
        fuel prices to shippers through price indices, tariffs, and by
        contract, within agreed upon guidelines. While these programs provide
        effective and meaningful coverage, residual exposure remains as the
        fuel expense risk cannot be completely recovered from shippers due to
        timing and volatility in the market. The Company continually monitors
        residual exposure, and where appropriate, may enter into derivative
        instruments.

        Derivative instruments used by the Company to manage fuel expense
        risk may include, but are not limited to, swaps and options for crude
        oil and diesel. In addition, the Company may combine FX forward
        contracts with fuel derivatives to effectively hedge the risk
        associated with FX variability on fuel purchases and commodity
        hedges.

        The table below depicts the quarterly impact to net income (excluding
        recoveries through pricing mechanisms) and other comprehensive income
        as a result of our crude forward contracts had the price of West
        Texas Intermediate ("WTI") changed by $1 for the three months ended
        September 30, 2008:

          (in millions)                                  Three months ended
                                                         September 30, 2008
                                                        ---------------------
                                                                      Impact
                                                                    to Other
                                                                     Compreh-
                                                         Impact to    ensive
                                                        Net income    income
                                                        ---------------------
          $1 increase in price per barrel                  $   0.1   $   0.2
          $1 decrease in price per barrel                     (0.1)     (0.2)
                                                        ---------------------

          Note: All variables excluding WTI per barrel are held constant.

        At September 30, 2008, the Company had crude forward contracts, which
        are accounted for as cash flow hedges, to purchase approximately
        219,000 barrels over the 2008-2009 period at average quarterly prices
        ranging from US$35.17 to US$38.19 per barrel. This represents
        approximately 2% of estimated fuel purchases in 2008 and 2009. At
        September 30, 2008, the unrealized gain on these forward contracts
        was $14.7 million (December 31, 2007 - $21.4 million).

        At September 30, 2008, the Company had FX forward contracts (in
        conjunction with the crude purchases above), which are accounted for
        as cash flow hedges, totalling US$8.0 million over the 2008-2009
        period at exchange rates ranging from 1.2276 to 1.2611. At September
        30, 2008, the unrealized loss on these forward contracts was
        $1.3 million (December 31, 2007 - $3.5 million).

        In addition at September 30, 2008, the Company had diesel forward
        contracts which were not designated and accounted for as cash flow
        hedges, to purchase approximately 30,000 barrels during the fourth
        quarter of 2008 at an average price of US$130.83 per barrel. This
        represents approximately 2% of estimated fuel purchases in the
        quarter. At September 30, 2008, the unrealized gain on these forward
        contracts was not significant.

        For the three months ended September 30, 2008, "Fuel expense" was
        reduced by $3.4 million (three months ended September 30, 2007 -
        $3.5 million) as a result of $3.8 million in realized gains (three
        months ended September 30, 2007 - $4.1 million) arising from settled
        swaps, partially offset by $0.4 million in realized losses (three
        months ended September 30, 2007 - $0.6 million) arising from the
        settled FX forward contracts. For the nine months ended September 30,
        2008, fuel expense was reduced by $12.2 million (nine months ended
        September 30, 2007 - $12.9 million) as a result of $13.9 million in
        realized gains (nine months ended September 30, 2007 - $14.7 million)
        arising from settled swaps, partially offset by $1.7 million in
        realized losses (nine months ended September 30, 2007 - $1.8 million)
        arising from settled FX forward contracts.

        Credit risk
        -----------
        Credit risk refers to the possibility that a customer or counterparty
        will fail to fulfil its obligations under a contract and as a result,
        create a financial loss for the Company. The Company's credit risk
        regarding its investment in ABCP are discussed in more detail in Note
        10.

        Credit risk management

        The railway industry serves predominantly financially established
        customers and as a result the Company has experienced limited
        financial losses with respect to credit risk. The credit worthiness
        of customers is assessed using credit scores supplied by a third
        party, and through direct monitoring of their financial well-being on
        a continual basis. The Company establishes guidelines for customer
        credit limits and should thresholds in these areas be reached,
        appropriate precautions are taken to improve collectibility. Pursuant
        to their respective terms, accounts receivable are aged as follows at
        September 30, 2008:

        (in millions)

        Up to date                                                   $ 518.7
        Under 30 days past due                                          98.4
        30-60 days past due                                             18.7
        61-90 days past due                                             11.2
        Over 91 days past due                                           34.7
                                                                     --------
                                                                     $ 681.7
                                                                     --------
                                                                     --------

        Counterparties to financial instruments expose the Company to credit
        losses in the event of non-performance. Counterparties for derivative
        and cash transactions are limited to high credit quality financial
        institutions, which are monitored on an ongoing basis. Counterparty
        credit assessments are based on the financial health of the
        institutions and their credit ratings from external agencies. With
        the exception of ABCP, the Company does not anticipate non-
        performance that would materially impact the Company's financial
        statements.

        With the exception of ABCP, the Company believes there are no
        significant concentrations of credit risk. The maximum exposure to
        credit risk include our financial asset values reported in the table
        above, reconciling the carrying value positions of the Company's
        financial instruments with Consolidated Balance Sheet categories, and
        an indeterminable maximum under guarantees as discussed in Note 19.

        Liquidity risk
        --------------
        The Company monitors and manages its liquidity risk to ensure access
        to sufficient funds to meet operational and investing requirements.

        Liquidity risk management

        The Company has long-term debt ratings of Baa3, BBB, and BBB from
        Moody's Investors Service, Inc. ("Moody's"), Standard and Poor's
        Corporation ("S&P"), and DBRS respectively. The S&P rating has a
        negative outlook, while the ratings of Moody's and DBRS have a stable
        outlook. The Company intends to manage its capital structure and
        liquidity at levels that sustain an investment grade rating.

        The Company has a five year revolving credit facility of
        $945 million, with an accordion feature to $1.15 billion, of which
        $325 million was available on September 30, 2008.

        This facility is arranged with a core group of highly rated
        international financial institutions and they incorporate pre-agreed
        pricing. The revolving credit facility is available on next day
        terms.

        Surplus cash is invested into a range of short dated money market
        instruments meeting or exceeding the parameters of the Company's
        investment policy.

        The table below reflects the contractual maturity of the Company's
        undiscounted cash flows for its financial liabilities and
        derivatives:

        (in millions)                         As at September 30, 2008
                                       --------------------------------------
                                                  2009 -
                                          2008      2011     2012+     Total
                                       --------------------------------------
        Financial liabilities
          Short-term borrowings        $ 280.0   $     -   $     -   $ 280.0
          Accounts payable and accrued
           liabilities                   765.9      39.6         -     805.5
          Total return swap                  -      25.7         -      25.7
          Foreign exchange contracts on
           fuel                            1.1       0.3         -       1.4
          Long-term debt(1)                9.7   1,228.4   3,770.1   5,008.2
                                       --------------------------------------

        (1) Includes principal on long-term debt and undiscounted payments on
            capital leases

    15  Additions to investments and other assets

        Additions to investment and other assets includes the acquisition of
        locomotives and freight car assets of $20.9 million and
        $213.0 million for the three and nine months ended September 30,
        2008, respectively (three and nine months ended September 30, 2007 -
        $2.6 million and 14.5 million, respectively). These assets were
        purchased in anticipation of a sale and lease back arrangement with a
        financial institution.

    16  Stock-based compensation

        In 2008, under CP's stock option plans, the Company issued 1,360,800
        options to purchase Common Shares at the weighted average price of
        $71.59 per share, based on the closing price on the grant date. In
        tandem with these options, 425,850 stock appreciation rights were
        issued at the weighted average exercise price of $71.53.

        Pursuant to the employee plan, options may be exercised upon vesting,
        which is between 24 months and 36 months after the grant date, and
        will expire after 10 years. Some options vest after 48 months, unless
        certain performance targets are achieved, in which case vesting is
        accelerated. These options expire five years after the grant date.
        Other options only vest if certain performance targets are achieved
        and expire approximately five years after the grant date.

        The following is a summary of the Company's fixed stock option plans
        as of September 30 (including options granted under the Directors'
        Stock Option Plan, which was suspended in 2003):

                                       2008                    2007
                              ----------------------- -----------------------
                                            Weighted                Weighted
                                             average                 average
                               Number of    exercise   Number of    exercise
                                 options       price     options       price
                              ----------------------- -----------------------
        Outstanding, January 1 6,981,108       43.97   6,815,494  $    38.50
        New options granted    1,360,800       71.59   1,304,200       62.60
        Exercised               (531,860)      34.49    (934,381)      31.99
        Forfeited/cancelled      (91,450)      47.78    (165,855)      36.16
                              -----------             -----------
        Outstanding,
         September 30          7,718,598       49.45   7,019,458  $    43.90
                              ----------------------- -----------------------
                              ----------------------- -----------------------
        Options exercisable at
         September 30          4,608,798       38.39   4,068,654  $    34.08
                              ----------------------- -----------------------
                              ----------------------- -----------------------

        Compensation expense is recognized over the vesting period for stock
        options issued since January 1, 2003, based on their estimated fair
        values on the date of grants, as determined by the Black-Scholes
        option pricing model.

        Under the fair value method, the fair value of options at the grant
        date was $14.1 million for options issued in the first nine months of
        2008 (first nine months of 2007 - $11.3 million). The weighted
        average fair value assumptions were approximately:

                                                               For the nine
                                                               months ended
                                                               September 30
                                                              2008      2007
                                                           ------------------
        Expected option life (years)                          4.39      4.00
        Risk-free interest rate                               3.54%     3.90%
        Expected stock price volatility                         22%       22%
        Expected annual dividends per share                $  0.99   $  0.90
        Weighted average fair value of options  granted
         during the year                                   $ 15.12   $ 12.97
                                                           ------------------

    17  Pensions and other benefits

        The total benefit cost for the Company's defined benefit pension
        plans and post-retirement benefits for the three months ended
        September 30, 2008, was $21.6 million (three months ended September
        30, 2007 - $15.9 million) and for the nine months ended September 30,
        2008, was $58.9 million (nine months ended September 30, 2007 -
        $68.6 million).

    18  Significant customers

        During the first nine months of 2008, one customer comprised 11.9% of
        total revenue (first nine months of 2007 - 11.6%). At September 30,
        2008, that same customer represented 4.7% of total accounts
        receivable (September 30, 2007 - 6.0%).

    19  Commitments and contingencies

        In the normal course of its operations, the Company becomes involved
        in various legal actions, including claims relating to injuries and
        damages to property. The Company maintains provisions it considers to
        be adequate for such actions. While the final outcome with respect to
        actions outstanding or pending at September 30, 2008, cannot be
        predicted with certainty, it is the opinion of management that their
        resolution will not have a material adverse effect on the Company's
        financial position or results of operations.

        During the quarter ended March 31, 2008, the Canadian Transportation
        Agency announced a Decision directing a downward adjustment of the
        railway maximum revenue entitlement for movement of regulated grain
        under the Canada Transportation Act, for the period from August 1,
        2007 to July 31, 2008. The Company has applied to the Federal Court
        of Appeal for leave to appeal the decision. The appeal was heard on
        October 15 and 16, 2008, and the decision is outstanding at this
        time. A provision considered adequate by management is maintained for
        the prospective adjustment. The retroactive component of the
        adjustment, relating to the period from August 1, 2007 to February
        19, 2008, which is estimated to be $23 million, is not considered to
        be legally supportable and as such a provision has not been made.

        Capital commitments

        At September 30, 2008, the Company had multi-year capital commitments
        of $570.5 million, mainly for locomotive overhaul agreements, in the
        form of signed contracts. Payments for these commitments are due in
        2008 through 2022.

        Operating lease commitments

        At September 30, 2008, minimum payments under operating leases were
        estimated at $717.0 million in aggregate, with annual payments in
        each of the next five years of: 2008 - $37.9 million; 2009 -
        $120.9 million; 2010 - $98.9 million; 2011 - $86.8 million; 2012 -
        $80.2 million.

        Guarantees

        At September 30, 2008, the Company had residual value guarantees on
        operating lease commitments of $248.2 million. In addition, the
        Company had residual value guarantees of $12.1 related to the
        Company's investment in the DM&E, which include minimum lease
        payments of $68.0 million, residual value guarantees of
        $12.1 million, and a line of credit of US$25 million. The maximum
        amount that could be payable under these and all of the Company's
        other guarantees cannot be reasonably estimated due to the nature of
        certain of the guarantees. All or a portion of amounts paid under
        certain guarantees could be recoverable from other parties or through
        insurance. The Company has accrued for all guarantees that it expects
        to pay. At September 30, 2008, these accruals amounted to
        $6.1 million.

    20  Capital disclosures

        The Company's objectives when managing its capital are:

        -  to maintain a flexible capital structure which optimizes the cost
           of capital at acceptable risk while providing an appropriate
           return to its shareholders;
        -  to manage capital in a manner which balances the interests of
           equity and debt holders;
        -  to manage capital in a manner that will maintain compliance with
           its financial covenants;
        -  to manage its long term financing structure to maintain its
           investment grade rating; and
        -  to maintain a strong capital base so as to maintain investor,
           creditor and market confidence and to sustain future development
           of the business.

        The Company defines its capital as follows:

        -  shareholders' equity;
        -  long-term debt, including the current portion thereof; and
        -  short-term borrowing.

        The Company manages its capital structure and makes adjustments to it
        in accordance with the aforementioned objectives, as well as in light
        of changes in economic conditions and the risk characteristics of the
        underlying assets. In order to maintain or adjust its capital
        structure, the Company may adjust the amount of dividends paid to
        shareholders, purchase shares for cancellation pursuant to normal
        course issuer bids, issue new shares, issue new debt, and/or issue
        new debt to replace existing debt with different characteristics.

        The Company monitors capital using a number of key financial metrics,
        including:

        -  net-debt to net-debt-plus-equity ratio; and
        -  interest coverage ratio: earnings before interest and taxes
           ("EBIT") to interest expense.

        Both of these metrics have no standardized meanings prescribed by
        GAAP and, therefore, are unlikely to be comparable to similar
        measures of other companies.

        The calculations for the aforementioned key financial metrics are as
        follows:

        Net-debt to net-debt-plus-equity ratio
        --------------------------------------
        Net debt, which is a non-GAAP measure, is the sum of long-term debt,
        long-term debt maturing within one year and short-term borrowing,
        less cash and short-term investments. This sum is divided by total
        net debt plus total shareholders' equity as presented on our
        Consolidated Balance Sheet.

        Interest coverage ratio
        -----------------------
        EBIT, which is a non-GAAP measure that is calculated, on a twelve
        month rolling basis, as revenues less operating expenses, less other
        income and charges, plus equity income in DM&E, divided by interest
        expense. The ratio excludes changes in the estimated fair value of
        the Company's investment in ABCP as these are not in the normal
        course of business.

        The following table illustrates the financial metrics and their
        corresponding guidelines currently in place:

        ---------------------------------------------------------------------
                                                      September    September
        (in millions)                    Guidelines    30, 2008     30, 2007
        ---------------------------------------------------------------------
        Long-term debt                               $  4,140.4   $  2,896.4
        Long-term debt maturing within
         one year                                         248.4         30.9
        Short-term borrowing                              280.0            -
        Less:
          Cash and cash equivalents                       (97.9)      (339.2)
        ---------------------------------------------------------------------
        Net Debt(1)                                  $  4,570.9   $  2,588.1
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Shareholders' equity                         $  5,805.3   $  5,161.1
        Net debt                                        4,570.9      2,588.1
        ---------------------------------------------------------------------
        Net Debt plus Equity(1)                      $ 10,376.2   $  7,749.2
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Revenues less operating
         expenses(2)                                 $  1,058.0   $  1,179.4
        Less:
          Other income and charges(2)                     (22.9)       (27.5)
        Plus:
          Equity income in DM&E(2)                         53.2            -
        ---------------------------------------------------------------------
        EBIT(1)(2)                                   $  1,088.3   $  1,151.9
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Net debt                                     $  4,570.9   $  2,588.1
        Net debt plus equity                         $ 10,376.2   $  7,749.2
        ---------------------------------------------------------------------
        Net-debt to Net-debt-plus-
         equity(1)               No more than 50.0%       44.1%        33.4%
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        EBIT                                         $  1,088.3   $  1,151.9
        Interest expense                             $    250.7   $    190.7
        ---------------------------------------------------------------------
        Interest Coverage
         Ratio(1)(2)               No less than 4.0         4.3          6.0
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        (1) These earnings measures have no standardized meanings prescribed
            by GAAP and, therefore, are unlikely to be comparable to similar
            measures of other companies.
        (2) The balance is calculated on a rolling twelve month basis.

        The Company's financial objectives and strategy as described above
        have remained substantially unchanged over the last two fiscal years.
        The objectives are reviewed on an annual basis and financial metrics
        and their guidelines are monitored on a quarterly basis. The interest
        coverage ratio has decreased during 2008 due to a reduction in year
        over year earnings and an increase in interest expense associated
        with the debt assumed in the acquisition of the DM&E. The Company
        believes that both the interest coverage and net debt to net debt
        plus equity ratios remain within reasonable limits, in light of the
        relative size of the Company and its capital management objectives.

        The Company is also subject to a financial covenant 'of funded debt
        to total capitalization' in the revolver loan agreement and the
        bridge financing agreement obtained for the acquisition of DM&E.
        Performance to this financial covenant is well within limits. The
        Company remains in compliance with all financial covenants.



                             Summary of Rail Data
                             --------------------

                                              Third Quarter
                           --------------------------------------------------
                              2008         2007       Variance         %
                           --------------------------------------------------
    Financial (millions,
     except per share data
     and ratios)
    ----------------------

    Revenues
    --------
      Freight revenue      $  1,239.5   $  1,147.6   $     91.9          8.0
      Other revenue              25.2         40.3        (15.1)       (37.5)
                           -------------------------------------
                              1,264.7      1,187.9         76.8          6.5
                           -------------------------------------
    Operating Expenses
    ------------------
      Compensation and
       benefits                 312.3        313.5         (1.2)        (0.4)
      Fuel                      275.8        185.6         90.2         48.6
      Materials                  49.3         49.6         (0.3)        (0.6)
      Equipment rents            44.4         49.6         (5.2)       (10.5)
      Depreciation and
       amortization             120.8        118.0          2.8          2.4
      Purchased services
       and other                158.9        149.9          9.0          6.0
                           -------------------------------------
                                961.5        866.2         95.3         11.0
                           -------------------------------------

    Operating income            303.2        321.7        (18.5)        (5.8)

      Equity income (net of
       tax) in Dakota,
       Minnesota & Eastern
       Railroad Corporation
       (DM&E)                   (16.5)           -        (16.5)           -
      Other charges               2.8          8.1         (5.3)       (65.4)
      Interest expense           64.5         44.9         19.6         43.7
      Income tax expense
       before foreign
       exchange (gains)
       losses on long-term
       debt and other
       specified items(1)        66.0         78.4        (12.4)       (15.8)
                           -------------------------------------
    Income before foreign
     exchange (gains) losses
     on long-term debt and
     other specified items(1)   186.4        190.3         (3.9)        (2.0)
                           -------------------------------------

    Foreign exchange (gains)
     losses on long-term debt
     (FX on LTD)
    -------------------------
      FX on LTD                   2.9        (64.3)        67.2            -
      Income tax on FX
       on LTD(2)                 (9.0)        21.0        (30.0)           -
                           -------------------------------------
      FX on LTD (net of tax)     (6.1)       (43.3)        37.2            -

    Other specified items
    ---------------------
      Change in estimated
       fair value of
       Canadian third
       party asset-backed
       commercial paper
       (ABCP)                    28.1         21.5          6.6            -
      Income tax on special
       charges                   (8.3)        (6.5)        (1.8)           -
                           -------------------------------------
      Change in estimated
       fair value of ABCP
       (net of tax)              19.8         15.0          4.8            -
      Income tax benefits due
       to rate reductions on
       opening future income
       tax balances                 -            -            -            -
                           -------------------------------------
    Net income             $    172.7   $    218.6   $    (45.9)       (21.0)
                           -------------------------------------
                           -------------------------------------

    Earnings per share (EPS)
    ------------------------
      Basic earnings per
       share               $     1.12   $     1.43   $    (0.31)       (21.7)
      Diluted earnings per
       share               $     1.11   $     1.41   $    (0.30)       (21.3)

    EPS before FX on LTD
     and other specified
     items(1)
    --------------------
      Basic earnings per
       share               $     1.21   $     1.24   $    (0.03)        (2.4)
      Diluted earnings per
       share               $     1.20   $     1.23   $    (0.03)        (2.4)

    Weighted average
     (avg)number of shares
     outstanding (millions)     153.8        153.2          0.6          0.4

    Weighted avg number of
     diluted shares
     outstanding (millions)     155.1        155.0          0.1          0.1

    Operating ratio(1)(3)(%)     76.0         72.9          3.1            -

    ROCE before FX on LTD and
     other specified items
     (after tax)(1)(3)(%)         9.1         10.4         (1.3)           -

    Net debt to net debt
     plus equity(%)              44.1         33.4         10.7            -

    EBIT before FX on LTD
     and other specified
     items(1)(3)(millions) $    316.9   $    313.6   $      3.3          1.1

    EBITDA before FX on LTD
     and other specified
     items(1)(3)(millions) $    437.7   $    431.6   $      6.1          1.4


                                             Year-to-date
                           --------------------------------------------------
                              2008         2007       Variance         %
                           --------------------------------------------------

    Financial (millions,
     except per share data
     and ratios)
    ----------------------

    Revenues
    --------
      Freight revenue      $  3,557.0   $  3,412.6   $    144.4          4.2
      Other revenue              74.9        106.7        (31.8)       (29.8)
                           -------------------------------------
                              3,631.9      3,519.3        112.6          3.2
                           -------------------------------------

    Operating Expenses
    ------------------
      Compensation and
       benefits                 956.1        975.8        (19.7)        (2.0)
      Fuel                      766.3        550.5        215.8         39.2
      Materials                 171.3        167.6          3.7          2.2
      Equipment rents           136.4        162.4        (26.0)       (16.0)
      Depreciation and
       amortization             365.4        355.7          9.7          2.7
      Purchased services
       and other                483.9        448.6         35.3          7.9
                           -------------------------------------
                              2,879.4      2,660.6        218.8          8.2
                           -------------------------------------
    Operating income            752.5        858.7       (106.2)       (12.4)

      Equity income (net
       of tax) in Dakota,
       Minnesota & Eastern
       Railroad Corporation
       (DM&E)                   (40.9)           -        (40.9)           -
      Other charges              14.4         21.1         (6.7)       (31.8)
      Interest expense          187.3        140.9         46.4         32.9
      Income tax expense
       before foreign
       exchange (gains)
       losses on long-term
       debt and other
       specified items(1)       138.5        209.0        (70.5)       (33.7)
                           -------------------------------------
    Income before foreign
     exchange (gains) losses
     on long-term debt and
     other specified items(1)   453.2        487.7        (34.5)        (7.1)
                           -------------------------------------

    Foreign exchange (gains)
     losses on long-term debt
     (FX on LTD)
    -------------------------
      FX on LTD                  12.4       (161.5)       173.9            -
      Income tax on FX
       on LTD(2)                (12.4)        47.4        (59.8)           -
                           -------------------------------------
      FX on LTD (net of tax)        -       (114.1)       114.1            -

    Other specified items
    ---------------------
      Change in estimated
       fair value of
       Canadian third
       party asset-backed
       commercial paper
       (ABCP)                    49.4         21.5         27.9            -
      Income tax on special
       charges                  (14.6)        (6.5)        (8.1)           -
                           -------------------------------------
      Change in estimated
       fair value of ABCP
       (net of tax)              34.8         15.0         19.8            -
      Income tax benefits due
       to rate reductions on
       opening future income
       tax balances                 -        (17.1)        17.1            -
                           -------------------------------------
    Net income             $    418.4   $    603.9   $   (185.5)       (30.7)
                           -------------------------------------
                           -------------------------------------

    Earnings per share (EPS)
    ------------------------
    Basic earnings per
     share                 $     2.72   $     3.91   $    (1.19)       (30.4)
    Diluted earnings per
     share                 $     2.70   $     3.87   $    (1.17)       (30.2)

    EPS before FX on LTD
     and other specified
     items(1)
    --------------------
      Basic earnings per
       share               $     2.95   $     3.16   $    (0.21)        (6.6)
      Diluted earnings per
       share               $     2.92   $     3.13   $    (0.21)        (6.7)

    Weighted average
     (avg) number of shares
     outstanding (millions)     153.6        154.3         (0.7)        (0.5)

    Weighted avg number of
     diluted shares
     outstanding (millions)     155.2        155.9         (0.7)        (0.4)

    Operating ratio(1)(3)(%)     79.3         75.6          3.7            -

    ROCE before FX on LTD and
     other specified items
     (after tax)(1)(3)(%)         9.1         10.4         (1.3)           -

    Net debt to net debt
     plus equity(%)              44.1         33.4         10.7            -

    EBIT before FX on LTD
     and other specified
     items(1)(3)(millions) $    779.0   $    837.6   $    (58.6)        (7.0)

    EBITDA before FX on LTD
     and other specified
     items(1)(3)(millions) $  1,144.4   $  1,193.3   $    (48.9)        (4.1)

    (1) These earnings measures have no standardized meanings prescribed by
        GAAP and may not be comparable to similar measures of other
        companies.
        See note on non-GAAP earnings measures attached to commentary.
    (2) Income tax on FX on LTD is discussed in the MD&A in the "Other Income
        Statement Items" section - "Income Taxes".
    (3) EBIT:             Earnings before interest and taxes.
        EBITDA:           Earnings before interest, taxes, and depreciation
                          and amortization.
        ROCE (after tax): Return on capital employed (after tax) =
                          earnings before after-tax interest expense (last
                          12 months) divided by average net debt plus equity.
        Operating ratio:  Operating expenses divided by revenues.



                                              Third Quarter
                           --------------------------------------------------
                               2008        2007       Variance         %
                           --------------------------------------------------
    Commodity Data
    --------------

    Freight Revenues
     (millions)
    - Grain                $    227.5   $    237.8   $    (10.3)        (4.3)
    - Coal                      155.5        148.7          6.8          4.6
    - Sulphur and
       fertilizers              122.5        113.9          8.6          7.6
    - Forest products            65.7         68.0         (2.3)        (3.4)
    - Industrial and
       consumer products        197.4        159.3         38.1         23.9
    - Automotive                 83.1         71.4         11.7         16.4
    - Intermodal                387.8        348.5         39.3         11.3
                           -------------------------------------
    Total Freight Revenues $  1,239.5   $  1,147.6   $     91.9          8.0
                           -------------------------------------

    Millions of Revenue
     Ton-Miles (RTM)
    - Grain                     6,491        7,614       (1,123)       (14.7)
    - Coal                      5,455        5,400           55          1.0
    - Sulphur and
       fertilizers              4,722        4,967         (245)        (4.9)
    - Forest products           1,458        1,867         (409)       (21.9)
    - Industrial and
       consumer products        4,649        4,228          421         10.0
    - Automotive                  530          566          (36)        (6.4)
    - Intermodal                7,381        7,907         (526)        (6.7)
                           -------------------------------------
    Total RTMs                 30,686       32,549       (1,863)        (5.7)
                           -------------------------------------

    Freight Revenue
     per RTM (cents)
    - Grain                      3.50         3.12         0.38         12.2
    - Coal                       2.85         2.75         0.10          3.6
    - Sulphur and
       fertilizers               2.59         2.29         0.30         13.1
    - Forest products            4.51         3.64         0.87         23.9
    - Industrial and
       consumer products         4.25         3.77         0.48         12.7
    - Automotive                15.68        12.61         3.07         24.3
    - Intermodal                 5.25         4.41         0.84         19.0

    Freight Revenue per RTM      4.04         3.53         0.51         14.4

    Carloads (thousands)
    - Grain                      87.7        100.9        (13.2)       (13.1)
    - Coal                       70.3         70.7         (0.4)        (0.6)
    - Sulphur and
       fertilizers               45.4         47.6         (2.2)        (4.6)
    - Forest products            23.9         28.1         (4.2)       (14.9)
    - Industrial and
       consumer products         84.3         78.0          6.3          8.1
    - Automotive                 34.5         38.6         (4.1)       (10.6)
    - Intermodal                324.6        323.5          1.1          0.3
                           -------------------------------------
    Total Carloads              670.7        687.4        (16.7)        (2.4)
                           -------------------------------------

    Freight Revenue
     per Carload
    - Grain                $    2,594   $    2,357   $      237         10.1
    - Coal                      2,212        2,103          109          5.2
    - Sulphur and
       fertilizers              2,698        2,393          305         12.7
    - Forest products           2,749        2,420          329         13.6
    - Industrial and
       consumer products        2,342        2,042          300         14.7
    - Automotive                2,409        1,850          559         30.2
    - Intermodal                1,195        1,077          118         11.0

    Freight Revenue
     per Carload           $    1,848   $    1,669   $      179         10.7


                                             Year-to-date
                           --------------------------------------------------
                              2008         2007       Variance         %
                           --------------------------------------------------
    Commodity Data
    --------------

    Freight Revenues
     (millions)
    - Grain                $    662.9   $    681.4   $    (18.5)        (2.7)
    - Coal                      468.0        442.4         25.6          5.8
    - Sulphur and
       fertilizers              391.1        380.8         10.3          2.7
    - Forest products           182.1        214.3        (32.2)       (15.0)
    - Industrial and
       consumer products        550.1        470.0         80.1         17.0
    - Automotive                241.9        242.0         (0.1)        (0.0)
    - Intermodal              1,060.9        981.7         79.2          8.1
                           -------------------------------------
    Total Freight Revenues $  3,557.0   $  3,412.6   $    144.4          4.2
                           -------------------------------------

    Millions of Revenue
     Ton-Miles (RTM)
    - Grain                    20,764       22,407       (1,643)        (7.3)
    - Coal                     16,659       15,817          842          5.3
    - Sulphur and
       fertilizers             15,704       16,057         (353)        (2.2)
    - Forest products           4,421        5,886       (1,465)       (24.9)
    - Industrial and
       consumer products       13,791       12,538        1,253         10.0
    - Automotive                1,723        1,850         (127)        (6.9)
    - Intermodal               21,645       22,257         (612)        (2.7)
                           -------------------------------------
    Total RTMs                 94,707       96,812       (2,105)        (2.2)
                           -------------------------------------

    Freight Revenue
     per RTM (cents)
    - Grain                      3.19         3.04         0.15          4.9
    - Coal                       2.81         2.80         0.01          0.4
    - Sulphur and
       fertilizers               2.49         2.37         0.12          5.1
    - Forest products            4.12         3.64         0.48         13.2
    - Industrial and
       consumer products         3.99         3.75         0.24          6.4
    - Automotive                14.04        13.08         0.96          7.3
    - Intermodal                 4.90         4.41         0.49         11.1

    Freight Revenue per RTM      3.76         3.52         0.24          6.8

    Carloads (thousands)
    - Grain                     267.7        281.4        (13.7)        (4.9)
    - Coal                      212.3        204.2          8.1          4.0
    - Sulphur and
       fertilizers              151.1        159.1         (8.0)        (5.0)
    - Forest products            71.5         88.1        (16.6)       (18.8)
    - Industrial and
       consumer products        251.6        232.9         18.7          8.0
    - Automotive                110.9        126.7        (15.8)       (12.5)
    - Intermodal                936.4        923.0         13.4          1.5
                           -------------------------------------
    Total Carloads            2,001.5      2,015.4        (13.9)        (0.7)
                           -------------------------------------

    Freight Revenue
     per Carload
    - Grain                $    2,476   $    2,421   $       55          2.3
    - Coal                      2,204        2,167           37          1.7
    - Sulphur and
       fertilizers              2,588        2,393          195          8.1
    - Forest products           2,547        2,432          115          4.7
    - Industrial and
       consumer products        2,186        2,018          168          8.3
    - Automotive                2,181        1,910          271         14.2
    - Intermodal                1,133        1,064           69          6.5
    Freight Revenue
     per Carload           $    1,777   $    1,693   $       84          5.0



                                              Third Quarter
                           --------------------------------------------------
                              2008         2007       Variance         %
                           --------------------------------------------------

    Operations and
     Productivity
    --------------
    Freight gross ton-miles
     (GTM)(millions)           59,866       62,177       (2,311)        (3.7)
    Revenue ton-miles
     (RTM)(millions)           30,686       32,549       (1,863)        (5.7)
    Average number of
     active employees          16,329       16,136          193          1.2
    Number of employees at
     end of period             16,189       16,037          152          0.9

    FRA personal injuries
     per 200,000
     employee-hours(1)           1.75         2.08        (0.33)       (15.9)
    FRA train accidents per
     million train-miles(1)      1.48         2.39        (0.91)       (38.1)

    Total operating
     expenses per RTM(cents)     3.13         2.66         0.47         17.7
    Total operating
     expenses per GTM(cents)     1.61         1.39         0.22         15.8
    Compensation and
     benefits expense per
     GTM(cents)                  0.52         0.50         0.02          4.0
    GTMs per average active
     employee(000)              3,666        3,853         (187)        (4.9)

    Miles of road operated
     at end of period(2)       13,007       13,260         (253)        (1.9)

    Average train speed
    - AAR definition(mph)        23.9         23.8          0.1          0.4
    Terminal dwell time
    - AAR definition(hours)      21.3         20.1          1.2          6.0
    Car miles per car day       145.2        147.4         (2.2)        (1.5)
    Average daily total
     cars on-line - AAR
     definition(000)             86.1         81.3          4.8          5.9
    Average daily active
     cars on-line(000)(1)        53.3         55.7         (2.4)        (4.3)

    U.S. gallons of
     locomotive fuel per
     1,000 GTMs - freight
     & yard (1)                  1.13         1.16        (0.03)        (2.6)
    U.S. gallons of
     locomotive fuel
     consumed - total
     (millions)(3)               67.1         71.9         (4.8)        (6.7)

    Average foreign exchange
     rate(US$/Canadian$)        0.966        0.941        0.025          2.7
    Average foreign exchange
     rate(Canadian$/US$)        1.035        1.063       (0.028)        (2.6)


                                             Year-to-date
                           --------------------------------------------------
                              2008          2007      Variance         %
                           --------------------------------------------------
    Operations and
     Productivity
    --------------
    Freight gross ton-miles
     (GTM)(millions)          182,124      184,218       (2,094)        (1.1)
    Revenue ton-miles
     (RTM)(millions)           94,707       96,812       (2,105)        (2.2)
    Average number of
     active employees          15,875       15,633          242          1.5
    Number of employees
     at end of period          16,189       16,037          152          0.9

    FRA personal injuries
     per 200,000
     employee-hours(1)           1.44         1.98        (0.54)       (27.3)
    FRA train accidents per
     million train-miles(1)      1.77         2.17        (0.40)       (18.4)

    Total operating
     expenses per RTM(cents)     3.04         2.75         0.29         10.5
    Total operating
     expenses per GTM(cents)     1.58         1.44         0.14          9.7
    Compensation and
     benefits expense per
     GTM(cents)                  0.52         0.53        (0.01)        (1.9)
    GTMs per average active
     employee(000)             11,472       11,784         (312)        (2.6)

    Miles of road operated
     at end of period(2)       13,007       13,260         (253)        (1.9)

    Average train speed
     - AAR definition(mph)       23.8         23.5          0.3          1.3
    Terminal dwell time
     - AAR definition(hours)     22.3         21.9          0.4          1.8
    Car miles per car day       143.5        143.1          0.4          0.3
    Average daily total
     cars on-line - AAR
     definition(000)             84.3         81.4          2.9          3.6
    Average daily active
     cars on-line(000)(1)        55.4         57.9         (2.5)        (4.3)

    U.S. gallons of
     locomotive fuel per
     1,000 GTMs - freight
     & yard                      1.20         1.20            -            -
    U.S. gallons of
     locomotive fuel
     consumed - total
     (millions)(3)              217.0        221.0         (4.0)        (1.8)

    Average foreign exchange
     rate(US$/Canadian$)        0.988        0.897        0.091         10.1
    Average foreign exchange
     rate(Canadian$/US$)        1.012        1.115       (0.103)        (9.2)

    (1) Certain prior period figures have been revised to conform with
        current presentation or have been updated to reflect new information.
    (2) Excludes track on which CP has haulage rights.
    (3) Includes gallons of fuel consumed from freight, yard and commuter
        service but excludes fuel used in capital projects and other non-
        freight activities.
    





For further information:

For further information: Media: Leslie Pidcock, Tel.: (403) 319-6878,
email: leslie_pidcock@cpr.ca; Investment Community: Janet Weiss, Assistant
Vice-President, Investor Relations, Tel.: (403) 319-3591, email:
investor@cpr.ca


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